Monday, September 8, 2008

Freddie and Fannie do the two step

You will all read much nonsense in the financial "press" today about Fannie and Freddie being rescued. The story goes something like the housing market will be saved by this move. It's bullshit. You all remember how the last bailout bill from June was supposed to save the housing market? Or the mini-bailout from last fall that was supposed to save the housing market? Or the HOPE NOW program that was supposed to slow down foreclosures. Or the devaluing of the dollar for the past year that was supposed to save housing, which instead created $130 oil? How's that that working for everyone. After every federal government scheme to save the housing market, the housing market crash accelerated.

Each of these bailouts do nothing but throw government money at the problem with no results. It's like public education. The more money thrown at the problem, the worse it gets. I mean come on people, we're taking about two of the most evil entities out there. Government and union in the form of unionized government employees. Expecting anything other than failure from this combination is silly. You have unionized workers who can't ever be fired no matter how much they screw up. And you have government with endless access to tax dollars and no accountability. Expecting anything other than complete and utter failure is silly.

And yet 1/2 the population thinks this entity should also manage your health care and figure out which doctor you should see. Scary shit indeed. Anyway, back to housing....

What the talking heads on CNBC will say is that the takeover will result in lower interest rates for mortgages, and therefore, presto bingo, the housing crash will end. If only it were that easy.

First off historically speaking interest rates are very low. A 6.5% 30 year fixed is a great rate when compared to the 90s when 8% was the norm. 6.5% may seem high when compared to 2002-2004, but that was an aberration. The housing bubble occurred because of these insanely low interest rates. That should not be repeated again. But like I said, this is the US federal government we're talking about here so of course they will do the wrong thing.

GM has been offering 0% financing for the past 7 years. And still the company is well on its way to bankruptcy. Bribing customers with cheap financing doesn't work in the long run. It may bring a few people into the showroom, but if your product is a piece of junk, 0% or 5% financing leads to the same result: no sales.

And housing right now is a piece of junk without further price falls. The $400K home of 2006 is now $300K. A good start. But its real value is $175K. And until that price hits the true market value all the Freddie and Fannie dances won't do shit. It's the equivalent of a Honda Civic being sold for $35K but with low, low 0.9% APR. Not gonna have too many sales at that price.

However given that 50% of the country will vote for Barry Hussein Obama and 50% of the country thinks the bureaucrats in DC should choose your doctor, there will be morons who fall for this scam. Aww gee wiz Sally, look, we can get a 5.5% mortgage and buy that dream house we've always wanted. And look it's on sale from $400K, we are getting a heck of a deal. Well, good luck with that, and don't come crying to me when you try to sell in 5 years and it's only worth $200K.

1 comment:

joey said...

Masterful rant. Good libertarian gray matter. You're invited to rant on my phone-in podcast on tonight on the bailout. Later in the week is alos ok if tonight isnt good.
My podcast hours are between 6pm and 8pm pacific. email me on if so, it'll be fun.
to be continued,