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5 Reasons Why We Are Likely To Have a Second Mortgage Market Collapse

By: Steve Johnson

9/22/2009 - 37 Comments

The housing market that began to stabilize in the last few months, as the plethora of government interventions in the housing market has finally helped form a bottom, is about to give way. 

A Bloomberg article yesterday outlined what is holding up the housing market.

First, there is the $8,000 first-time home buyers’ tax credit that is about to expire.

“Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. “

Second are the low interest rates, which are only low because the government is purchasing billions of dollars in bonds to keep the interest as low as possible.

“Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans”

“Under the current program, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter. “

“An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official.”

Third, there are millions of foreclosures yet to hit the market because many of them have been held off the market by banks waiting for the market to show signs of recovery.

“We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”

The question is how can the Fed exit the housing market without it collapsing again?  There is a very slim chance that these programs will get extended.

“Congress may not pass an extension; the chances “seem slim,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former staffer on the Senate Banking Committee. Public opposition to increasing the federal budget deficit is high, and there’s little appetite on Capitol Hill for finding spending cuts to offset the cost of the tax credit, he said.

The deficit will total $1.6 trillion this year as revenue falls and the government spends at the fastest pace in 57 years.”

“In a sign of the public’s concern about the deficit, 62 percent of people surveyed in a Sept. 10-14 Bloomberg News poll said they would be willing to risk a longer-lasting recession to avoid more government spending. “

Fourth, ARM mortgages "are about to explode." At least, that's what the attorney general of the sovereign state of Iowa says. ARM loans allow homeowners to pay only the interest for the first few years.  Many ARM loans are coming due and will be resetting next year, which will increase these mortgage payments by 2 to 3 times what they are today. 

Almost all these homeowners are underwater. They bought at the peak of the bubble.  How many of them can afford a 200% increase in their mortgage payments?  Not many.

That's why a new wave of foreclosures and personal bankruptcies is coming.

Fifth, the unemployment rate continues to climb and is likely to reach 10% in the next few months.  California’s jobless rate has risen above 12%.  Few jobs means few people will be able to purchase homes, which means the supply of homes will remain higher than the demand. 


The government will have to end their programs that are propping up the housing market and banks will be forced to sell their foreclosures - leading us to a second housing market collapse. The only thing that will stop the fall of housing prices this time will be the effects of inflation as the trillions of new dollars that the Federal Reserve has created make their way into the economy. 

Based on this information, housing prices are likely to drop another 10-30% in the next 2-5 years.  Renting is likely the best option during this period, unless you can secure a long term low interest rate with a mortgage payment that you could pay without having a job.

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