Goodby Fannie and Freddie
Recently the Press Enterprise ran a story about the Obama administration’s planned phase out of industry giants FANNIE MAE and FREDDIE MAC who combined hold over half of the nations mortgage securities.
The stated motivation for this move is to lessen governments role in the real estate industry.
The big question is twofold first what does this mean for us today? And, what will it mean for us in the future?
It should be noted that the prevailing thought is that in order to avoid a catastrophic collapse of our financial system the transition will need to be stretched out over a protracted period (probably five years or more).
So for the short term this will hardly cause a ripple. However, in order for our secondary market to survive (which is in our best interest) the private sector will need to fill the void left by the exit of Fannie and Freddie from the market place.
The likelihood of this happening today is very slim. You see not only is America on sale (evidenced by the most affordable housing cost in history) so is her money.
Today interest rates are at or near all time lows thanks in no small part to influx of cash and guarantees from our federal government. And if we are to attract private money into the secondary market, the cost of money will need to go up.
You see the private sector has this quirky need to see potential risk be offset by potential income. The reason for this is simple. Unlike the federal government (who can print money when they need to) the private sector exist by the good graces of a finite supply of money. When they invest they have the expectation of making a profit.
So the private sector will do one of two things when a market shifts and profits are scarce, they either pull out and reinvest elsewhere. Or, they increase the cost of their money in order to offset the risk of loss.
To put it another way, they increase interest rates. Unlike the federal government who rarely has an expectation of profit from investment, the private sector can’t survive without profit. And, they cannot print money to make up for a loss.
So, in order for us to enjoy a healthy secondary market (this is critical to the health of our economy) interest rates will need to go up. Nothing short of substantial rate increases will make it enticing for private money to stay in the secondary market for the long haul.
So what I am about to say now may shock you. But I promise you it is 100% true. Today is the day you should jump off the fence. Today is the day you should consider buying your next (or, your first) home.
Interest rates are at historically low levels. And, housing has never been more affordable. I promise you that there will be countless consumers who fail to heed this call to homeownership, who wake up one day only to find themselves once again priced out of the market.
Don’t let this happen to you. Prices are going to increase. Interest rates are going to go up (they have to).