New Housing Bailout Proposal and Why it Won't Work

According to stories in Yahoo and the WSJ, the gov will attempt to push rates for new qualified buyers on new home purchases to 4.5%. We are early to say it won't work.

Why? Several reasons :

1) People fear layoffs or getting their hours cut back, so there is no need to take out such large debt.

2) Too many homeowners already. Housing was pushed to a level whereby everyone, including just out of college students and illegal immigrants that wanted a house, bought a house.

3) Psychology has changed. It was the grandest bubble of all time. People bought simply because prices were going up. Not because they needed to own, or because there was value. When a bubble bursts, the mind shift changes. It won't end until people are totally indifferent to owning versus renting. Why take out a huge loan now, even if one can afford it, when prices are only going down?

4) The Japanese experience shows that you can push mortgages rates to less than 2% and housing can still be down 60%+ from its all-time high 17 years later. The money is free in Japan, but guess what? No one wants to own. They believe that housing is a bad investment, and it has been in Japan since 1991. Prices have only begun rebounding in the last few years.

Housing will bottom, as we have said before, at lower prices and when people believe that one only ever loses money in real estate. That is how all bubbles have, and always will, reach a bottom.


http://finance.yahoo.com/tech-ticker/article/138829/Mortgage-Rates-to-4.5-Percent-Homebuilders-Win-Crisis-Continues?tickers=TOL,HOV,CTX,DHI,LEN,XHB,CTX