Housing Market Economic Analysis to Term Paper

Excerpt from Term Paper :

Even Fannie Mae and Freddie Mac should be made totally independent from the government. This should be followed up by other methods to increase the individual ownership of housing and at the same time reduce the costs of owning a house. Even if the housing sector cannot be made totally private, it is important that the government make statements saying that it has no intentions of supporting Fannie Mae and Freddie Mac any further, and at the same time, try to improve the operations of these two companies. This can be achieved by limiting the amount of debt that these regulatory deposit organizations can hold and also focusing clearly with the two institutions on the sections of the housing market where their activities would provide the best social benefits. (Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy)

The weakness comes from the feeling that contingent mortgage obligations are second only to treasury bonds and at the same time are not totally supported by the U.S. government. When the interest rates change, as it happened in 1990s with a dot com share which went beyond all reason, the markets suddenly rose and fell. Then the Federal government team had to cut interest rates very sharply back to get the market thinking logically again. Yet the drop in interest rates makes the investors feel that they have lost money, and at that time they had concentrated on homes and real estate. The government has not been able to control the imagination of the people, and the next dream has been on its way. This is reflected in the statement of Chairman Greenspan to Congress in the last two years to control Fannie Mae and Freddie Mac better. (Is the Housing Market Going to Crash?)

Once that is done, the house owners will also have to start looking fresh at the annual increase in cost of homes which has now reached 10% annually. Some of them regularly use this source of funds like an ATM for their other dreams. Some expect that home appreciation will pay for their retirement or education of their children will no longer find it possible. Even as a country, U.S. will have difficulties in financing the deficit that it has in its current account, as about $400 to $500 billion have been poured into the U.S. through this route by foreign investors. When the investment in housing becomes slow and fewer mortgages take place, then this market could slowly be invested elsewhere. At the same time, the high costs of borrowing are pushing potential home buyers out. For home buyers the cost is determined by the monthly charges that he has to pay. When a home buyer has an income of $100,000 a year and he can pay $40,000 cash, and when the cost of mortgage is at 5% for a 30-year loan, he can pay as much as $421,000 for the house. When the mortgage rate increases to 6%, his capacity drops to a $390,000 home and at 7% the limit becomes only $362,000. This happens at all income levels and this drop in affordability will cut down on the prices of housing which people can afford to pay. This stops the cycle. (After the Housing Boom)

The ease of availability of money and its comparative cheapness has led to a great boom or inflation in real estate prices. When these gains are locked in the property for the people who stay there, it does not directly affect the economy, but when this increase in prices can be cashed out by the owners through equity loans, then it causes the economy to keep spending. (Is the Housing Market Going to Crash?)


After the Housing Boom. 11 April, 2005. Retrieved at http://www.businessweek.com/magazine/content/05_15/b3928001_mz001.htm. Accessed on 30 April, 2005

Cederholm, Fred. Is the Housing Market Going to Crash? Retrieved at http://baltimorechronicle.com/033105Cederholm.shtml. Accessed on 30 April, 2005

Federal Home Loan Bank System. Retrieved at http://www.fhfb.gov/FHLB/FHLBS.htm. Accessed on 30 April, 2005

Housing' Direct Economic Impact. 2005. Retrieved at http://www.nahb.org/generic.aspx?sectionID=784&genericContentID=543Accessed on 30 April, 2005

The local economic impact of home building. 2005. Retrieved at http://www.nahb.org/generic.aspx?sectionID=784&genericContentID=35601Accessed on 30 April, 2005

White, Lawrence H. Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy. Policy Analysis. No: 528. October 7, 2004. Retrieved at http://www.cato.org/pub_display.php?pub_id=2467Accessed on 30 April, 2005

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