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Government Plays Dr Seuss By Artificially Propping Up House Prices

Housing-Market / Government Intervention Jul 27, 2008 - 08:35 PM GMT

By: David_Vaughn

Housing-Market Best Financial Markets Analysis ArticleEver notice how those books at home on your shelves seems to grow higher and higher over the years? I noticed the same thing myself and decided to weed out the old books that no longer seemed worthwhile to keep. Among those dusty books I discovered were books that I read to my child just a few “short” years ago. The Tonka truck book, the book about trains and ships, Yertle the Turtle, Dr. Seuss.

Where do the years go? This is what I mean when I talk about the slow subtle change occurring in our economy and country. The change is so gradual that we do not even notice it until we look back years down the road and finally comprehend our changed world around us. And what about that bank run?

“Bank depositors rushed to withdraw money from the bank, even though such deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation…” “With the depositors' demand for their money many analysts were predicting a sale of the entire company or a bankruptcy.”

And more?

“IndyMac depositors pull cash as mortgage woes grow” “IndyMac shares sank 38 percent to 44 cents. A collapse of the largest independent, publicly traded U.S. mortgage lender could prove a headache for U.S. regulators since more than $17 billion of its deposits carry federal insurance.” “Paul Miller, a Friedman, Billings, Ramsey & Co analyst, said shareholders may be wiped out, citing IndyMac's decision to stop most mortgage lending and inability to raise capital. Miller cut his price target for the stock to zero from $1.00.”

Of course getting back to the children's books wouldn't it be wonderful if you could go back to those years when you had someone to read these books to? I suppose the time will come when we look back with nostalgia when housing markets were governed by natural circumstances and not Uncle Sam. You know, it is not my intention to be an alarmist or a chicken little. It is not my attempt to run shouting that the world is coming to an end. But what is wrong with factual knowledge?

“Taking advantage of the momentum behind the election-year housing package at a time when economic woes top voters' concerns, Democratic leaders planned to include a separate measure to increase the statutory limit on the national debt by $800 billion, to $10.6 trillion.”

I look in the news and see what is going on in the world. It is not make believe. Much of what is occurring today are the affects of cyclical changes. In a generation the world changes. Much as we see happening today.


“Existing home sales fall 2.6 percent in June” “Sales of existing homes fell more sharply than expected in June as the housing industry continued to be bruised by the worst slump in more than two decades.”

I'm trying to remember how often we have had a run on a bank in this country. I do believe that fact to be of significance. Well, it looks like the inevitable bailout is soon to come to the housing market fiasco. Simple solution as usual. Just throw more money at it. So what if our total national debt is soon to top 10 trillion dollars? No problemo. Just like a fire. Just add more wood. But what happens when the last tree is cut down in the forest?

“Fannie and Freddie own or guarantee nearly half of the $12 trillion in outstanding U.S. home mortgage debt and are playing an increasingly crucial role as the nation's housing market struggles through its worst slump since the Great Depression.” "The big picture is that home prices are still going to drop more, even from here…"

Seen the new Batman movie? There is a scene where the Joker sets fire to a pile of billions of dollars stacked all the way to the ceiling. I believe the Joker once worked for the US government. What does the bailout mean? Of course additional billions cost to taxpayers, a reckless bailout to lenders. Ultimately, borrowers will only find reasons to default. Default is good when a guaranteed government plan exists with lots of goodies. - “I used to try and save for my retirement…….after listening and watching the situation with housing, I have decided to spend all my money and not save a penny. When I do retire, if I don't have any money, I feel confident that the government will take care of me……especially if I whine and complain about how unfair life is……….” “I am not pleased with families losing homes, but I am even less pleased with those families having bought the homes in the first place. Some argue that this bail-out will help speculators. I argue that anyone who bought a home they could not afford was a speculator.”

Presently, Fannie Mae and Freddie Mac are companies that are shareholder owned. That means, potentially, the average man on the street owns these two giant mortgage institutions via their share holdings. But if the Treasury secretary has his way then the US government could soon become the principle shareholder. Another 100% government institution. Of course President Bush doesn't see this as a bailout. Shareholders will still own Fannie Mae and Freddie Mac. But those shareholders just may become our government. Part of the bailout plan will allow the US Securities & Exchange Commission to limit the ability of traders to bet on a share decline in Freddie and Fannies' brokerage held shares. Sounds like socialism and a bailout to me. - “Think about it. If someone entered into a mortgage with payments they could not afford based on refinancing later on (thanks to rising prices) this means they were speculating. Additionally, rising prices would not make their mortgages affordable. It would imply greater debt and higher payments. The only thing you can do with a home you can't make payments on is to sell it. It is not up to the taxpayer to fund a bail-out. It is up to the mortgage brokers and bankers who benefited from the bubble. Billions of dollars were pocketed by builders, bankers, and brokers. They should pay for this mess. This plan is simply an indirect transfer of money from taxpayers to Wall Street. It will provide minimal aid to homeowners. It is a bad idea but typical of modern America .”

What are the true actual consequences of a government bailout of the mortgage industry? It is important to remember that nothing comes free, but generally there is a hefty price tag for everything perceived as “free.” A bailout would require responsible Americans to become responsible for the actions of greedy bankers and home owners who simply became over extended. Hey, that sounds great! Wouldn't you like to know that in the future if you ever got behind on your house payment you could simply wait for your home to go into foreclosure and then turn to the government for free monetary help?

“Many problems with mortgage bailouts” “There are calls for the government to help homeowners at risk of foreclosure. But some experts think a mortgage rescue could cause more problems than it solves.” “Congress appears eager to help more than a million homeowners facing foreclosure, but a proposal aimed at fixing the battered housing market could instead end up as the latest blow to a recovery.”


“Critics, including some in Congress, say the rescue plan rewards reckless behavior and transfers risk to homeowners and lenders who were responsible during the housing boom.” “Robert Shiller, a Yale economist who has long argued there was a bubble in home prices, thinks the plan will do little to stop the slide in housing prices.” “The runup earlier this decade, fed by low interest rates from the Federal Reserve and lax underwriting standards by lenders, created a bubble that hasn't yet completely deflated. Shiller notes that prices shot up 85% when adjusted for inflation from 1997 through mid-2006 and have fallen only about 15% since then. Shiller adds that when compared to measures such as rents and household income, housing prices are still out of equilibrium” "I'm not sure we can achieve continuing high home prices," he said.” “If he's right, more borrowers may find themselves owing more than their house is worth, which could add to the number of foreclosures and homes on the market.”

And more? Isn't the FHA already strapped?

“And the FHA is already strapped. The agency's estimated losses are already soaring and the FHA has been warning Congress it might no longer be able to count on premiums paid by borrowers to cover its losses.” “…as painful as it may be, the best way to fix the housing crisis is for the free market to run its course.” “After all, lower home prices might actually help stimulate demand again.” "What the market is in the process of doing is bringing home prices back to where they should be by any traditional measure," said Barry Ritholtz, CEO and director of equity research Fusion IQ. "If home prices don't go down, it means newlyweds can't go out and find a home they can afford."

I like the following additional comment below. Very revealing.

"Fixing the prices of one asset will distort the price of others," he said, adding that the Fed's actions could lead to inflation in other parts of the economy, as the Fed's efforts to inject money into the troubled credit markets could lead to an even weaker dollar and higher commodity prices, which would feed price pressures down the road.”

Are we becoming gradually with every passing year a true socialist state as Europe is today? Another side effect of a free bailout would prevent housing prices from returning to normal market values. Again, if the idea can be grasped the present home market price of houses across the country would be permanently and forever propped up by what ever price the government guarantees for the sake of the home owner seeking foreclosure help. Yes, the idea for help for everyone having trouble paying their monthly house payment sounds wonderful but it is good to remember what the true cost will be.

And in my humble opinion the propping up of present house values by the US government appears to be the highest price to pay for those honest individuals saving to put a down payment on their first home down the road. So, all you out there renting looking for a great deal on a house can forget about it because your government is going to do its part in keeping house prices artificially high. But really, who is benefiting the most from this coming bailout? Yes, you guessed it! The banking industry.

“It Ain't Funny Anymore” July 24, 2008,, youtube

For those of you who have been financially responsible in reading the fine print on your mortgage contract don't you now feel stupid for your hard effort to be a responsible home owner? Tomorrow, there will be no reason to ever fear a foreclosure because your government will be there to bail you out. Sounds great to me! But like I said be prepared to calculate this cost.

And also minorities will pay a greater price for a home in the future because of higher prices. The idea of affordable housing and artificially higher house prices does not compute. Remember all your neighbors who used their home equity a few years ago for expensive vacations? Well, now you will be paying for these past home equity loans that are made possible because of housing prices that automatically go up every year.

And as previously stated another end result of this bailout will be a higher national debt to pay for all of this. I see why so many people today are slipping through our borders to become American citizens. Welfare from the cradle to your home.

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By David Vaughn
Gold Letter, Inc.

© Copyright 2008, Gold Letter Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2008, Gold Letter Inc.

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