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Paulson Conspires with the National Association of Realtors to Pimp Housing Again

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December 04, 2008 – Comments (3)

Either I was too tired last night when I first read this article, or it's been updated. Either way, I didn't notice this despicable example of bizarro-world lobbying.

Treasury officials said they were optimistic that subsidizing lower mortgage rates with taxpayer dollars would help revive the housing market, sources said...

A source said Treasury officials suggested at the meeting that the Realtors start a grass-roots campaign to press the mortgage rate plan with lawmakers.

Are you kidding me? Treasury is telling the lie-spewing National Association of Realtors that it needs to do more lobbying in order to give the 6-percent scalpers another shot at another taxpayer-funded real estate bailout? Before houses have even reached their historically normal price-to-rent or income-to-price ratios?

Idiots is too kind a word for people who think cheap money is the solution to the mess created by cheap money.

 

3 Comments – Post Your Own

#1) On December 04, 2008 at 10:39 AM, Gemini846 (57.62) wrote:

Do you have a link to the most current price to rent ratios? How close are we to normalized? 

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#2) On December 04, 2008 at 10:46 AM, TMFBent (99.82) wrote:

There should be plenty of them at calculated risk.

Here is a snippet of a good post that explains why this treasury plan is so idiotic -- as are "analyses" that believe this will lead to price stabilization, or appreciation.

It is true that the rent vs. buy decision moves in the "buy" direction with lower interest rates.

Say someone is paying $1000 per month in rent, and they are interested in buying a $240,000 house with $24,000 down (10%). With a 6% mortgage rate the principle & interest (P&I) payment alone would be $1295 per month. Add in insurance, maintenance, mortgage insurance, property taxes and other costs and fees (like HOA) and subtract the income tax break, and it probably doesn't work.

We need a spreadsheet and more details to work it out exactly.

But at a lower mortgage rate - say 4.5% - the P&I would be $1,095 and depending on the other costs, and with all else being equal, buying might make sense.

But why would this push up prices as suggested by the Global Insight analysis? Prices would increase because of higher demand - not directly because of lower interest rates. A rational buyer wouldn't pay more just because the interest rate is lower - although they might have to pay more because the demand is greater. But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.

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#3) On December 05, 2008 at 12:37 AM, dexion10 (27.60) wrote:

TMFBent ... thanks for the post.


I think the plan is idiotic as well. The other reason the plan is idiotic is that when 10-yr treasury yields move higher and mortgage rates move higher after this artificial stimulus - then home prices will be held back by rising rates.

I HAVE ONE BIG DISAGREEMENT WITH THE COMMENTS ABOVE

lower mortgage rates will impact housing prices immediately.

Another reason (besides demand) that lower rates push prices of homes up is that a home buyer has a maximum amount they are willing to pay for a home...

Let's say that max monthly payment a home buyer wants to make is $1000 per month (let's also not ammortize for 30 yrs in this example) 

If interest rates are 10% - then the buyer could only afford a house that cost $900 per month

If interest rates were cut ot 5% the buyer could afford $950 per month

As interest rates go down then the home buyer will pay less interest and have more money available to buy a more expensive house. 

Home sellers are just as rational as home buyers - they will adjust the prices of their homes accordingly.

So I disagree with the statement that home prices will ONLY go up because of increased demand - they will also go up or stabilize sooner  because a buyer will have more money to allocate to the home price vs. monthly nterest payments.

 

To Clarify I disagree with this  statement: 

But why would this push up prices as suggested by the Global Insight analysis? Prices would increase because of higher demand - not directly because of lower interest rates. A rational buyer wouldn't pay more just because the interest rate is lower - although they might have to pay more because the demand is greater. But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price.

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