To date, the Federal Government has pumped over $1.25 TRILLION into the mortgage market in an attempt to boost slumping activity and aid the overall economy. However, the end may be in sight ? the Federal Reserve is considering ending aid as of March 31.
The Real Estate Market Drives the Economy
The housing market has been a form of life support to the economy?without this activity the economic crash would have much more severe. If the government withdraws their support we will very likely see significant upward movement in mortgage rates, causing another decline in the housing market.
Most mortgages are not held long term by banks. Instead, they are packaged and made attractive for sale to Wall Street. This creates liquidity in the banks, and frees up money to be lent again in the mortgage market. After the credit crunch erupted in 2008, many investors lost their appetite for mortgage backed securities, and the Federal Reserve stepped in to fund purchases on the secondary market and keep money flowing back to banks and ultimately to home buyers.
The Federal Government Plans to Pull from Mortgage Baked Securities
In January 2009, just after the 2008 credit crunch, the Fed started buying securities back by Fannie Mae, Freddie Mac, and Ginnie Mae, with the original plan of continuing this activity through January 2010. They have since extended the program an additional three months to continue support of the housing market. The ultimate outcome of this program will not be known until the government sells off these securities to other investors. The degree of profit or loss remains to be seen.
Experts agree that if the Federal Government stops the assistance program, mortgage rates will rise. Right now, they are absorbing about $12 billion a week in excess supply. When they stop, the market will have to pick up the slack.
First Time Home Buyer Tax Credit Set to Expire
My personal concern is that with the home buyer?s tax credits of $8,000 first time buyers and $6,500 for repeat buyers expiring on April 30th, what will motivate the buyers? Those people who were on the fence may have bought a little earlier than they had planned due to the incentives, but what happens May 1st? No more tax credit, combined with rising interest rates, certainly limits the incentives and motivation of potential buyers. The cost of buying a home will rise significantly and we may expect early summer sales to slow.
If sales do slow what will the Federal Government do? Will Congress simply activate a third tax credit (or as I like to call it, tax crutch) for another 6 months? as it did it once before? And what after that?