Monday, July 14, 2008

Fannie Mae and Freddie

A regular reader writes:

The Fannie/ Freddie crisis is the real need now, that must be resolved quickly to avoid a deep downward market Jack.

Yes and No! The home price down turn started almost three years ago. It is pretty much over, except for the crying. Alarmist headlines are using problems in big cities and resort areas to show that home prices are dropping but the reader who wrote the above recently sold his home at a good price and after only a few days on the market. In fact, home prices are going up in more markets than down. Furthermore, a big decline in energy prices will restore confidence to a lot of potential buyers who are sitting on the sidelines.

The former chairman of Goldman Sachs, our treasury secretary, is using the weak housing cycle as a club to encourage congress to take certain actions. Just a few representatives have been able to stall the housing bailout bills that has passed the house and senate. Incumbent representatives need a few "wins" badly. Ninety-one percent of those polls do not believe congress is doing a good job. More than half believe congress is doing a poor job. These are the kind of poll numbers that can lead to significant election turnover.

Fannie and Freddie are quasi government agencies. The FOMC has opened up the fed window to these firms. Free market competition would be a better system, but the trick is getting over the short term hump. It appears that the treasury secretary will work with congress to develop the appropriate legislation. With most housing markets already bouncing off the bottom, the congress can pass the legislation that will be perceived as "saving the day". Between now and October, a number of "problems" will be solved. The big three will be housing, energy and Middle East War.

My belief is that the three dominoes will fall in the following order, peace agreements, lower oil prices and then a rebound in housing. If I am wrong about the order but right about the events, I will be a happy camper.