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Will the Fed’s Exit Impact Home Prices?

The Fed has withdrawn from purchasing mortgage-backed- securities and will be exiting from the Homebuyer’s Tax Credit after April 30, 2010 (the date the property must be in contract). Many people are talking about the affect these moves will have on purchasers. We should also be looking at how the ending of these programs will impact home values.

The government programs were not enacted just to make it easier for the buyer to purchase a home. The main reason the administration became so heavily involved was to stabilize home prices. How do we know this?

The TARP Report issued in January talks about the administration’s goal of ‘supporting, ‘boosting’ or ‘bolstering’ home prices 10 different times in the report:

Page 8

To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Page 10

Section 3 also explains some of the steps that the Federal Government has taken to support home prices during the financial crisis, including: direct purchase of MBS through the Federal Reserve’s Mortgage Purchase Program; support of the MBS portfolios of Fannie Mae and Freddie Mac through Treasury’s repeated investments in the preferred equity of those companies; purchases of MBS in TARP’s PPIP; and through tax subsidies in the form of the First-Time Homebuyer Tax Credit.

Page 111

The Government’s efforts to support home prices and the residential mortgage markets have resulted in its increasing presence as owner and guarantor of residential mortgages.

By supporting the mortgage markets, the Federal response has acted to lower interest rates, thus maintaining demand for housing and, by extension, supporting home prices.

Page 116

By bringing these buyers into the market, and minimizing the risks by pooling their strengths, FHA’s programs increase the demand for all homes, thus supporting home prices in general.

Page 126

MPP is the largest Government program for the residential mortgage market and focuses on Fannie Mae and Freddie Mac. The Federal Reserve announced the program on November 25, 2008, with the intention of supporting home prices:

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of homes, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Page 128

Supporting home prices is an explicit policy goal of the Government. As the White

House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”

Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices.

The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS.

Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit.

If they say ten different times in the same report that boosting home prices was their goal, I have to believe that was the goal. So the question that now must be askes is:

What will happen to home prices once the supports are removed?

What does this mean to you?

If you are thinking of selling your home, do it now before the impact is felt.


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