Fed Policy, Economics 101 & the Housing Market

The long held premise is that the fundamentals of the American economy are based upon free market principles, supply and demand. If there is an over abundant supply of something, demand goes down and prices fall. Look no further than the auto industry and what is happening to sales of gas guzzlers. Huge discounts are being offered attempting to entice consumers to move these vehicles off of the lot. On the other hand a limited supply can create a very high demand. Again look to the auto industry and Toyota’s Prius. Articles have appeared stating that a 90 day wait list exists in some areas and prices are far exceeding the sticker price

Housing Market Supply and Demand

Applying the same criteria to the housing market, the free market system becomes encumbered with a third party. Supply and demand are supplemented with governmental policy. Just like three of a kind will trump two pair, governmental policy will supersede supply and demand. Governmental intervention on supply and demand occurred in the following ways:

Easing of Credit – going back to 1990 we see that lenders were encouraged to make loans to people that had less than the appropriate credit required to qualify for a home loan. The other issue that has received less attention is mortgage fraud. With the easing of requirements, oversight became less important. Couple that with the new products created to encourage home ownership offering teaser rates and loans that would allow borrowers to postpone paying the full interest due, instead opting to keep adding it to the loan balance which could never be repaid. Proving that if the vault is open, people will help themselves to the money. Home ownership greatly increased. Along with home ownership the economy boomed. New household formations increase the sales of appliances, home furnishings and every related industry benefits. These were times of prosperity. Some people began to see the writing on the wall, but nobody wanted to be accused of being the party pooper. Wealth was being created.

Homes in Foreclosure – foreclosures have always been a part of the real state market. Typically they have been associated with the death of a bread winner, loss of a job or some other catastrophic event. They usually have not been associated with mortgage rates resetting. Lenders are now being ask to work with homeowners in foreclosure and either offer loan modification or reduce the principal balance on the property to stem the increasing number of foreclosures. With record numbers of home ownership it only seems natural that foreclosures would rise as well. Foreclosed homes will balance the housing bubble that was based upon a false positive by returning markets to a more affordable level.

As fed policy becomes more dominant in our industries are we moving towards the nationalization of our housing markets? We continually hear about the people who succumbed to the big bad lender and bought a home for more than they could afford and did not understand the terms of their mortgage. I’d like to hear some stories about the people who have had to make the hard decisions about their household budgets, or the folks who have had to take on another job. The ones who have pride and accept personal responsibility and will do what is necessary to provide for themselves or their family. These are the ones that seem to be forgotten and the bailouts, loan modifications, and principal reductions just don’t apply.

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