Housing and Bubbles

By Roosevelt Institute |

skyline-150Where is the real estate wreck heading?

Well, there was a meeting in DC this and the Treasury Secretary, Wall Street, banks, and MBS bondholders all agreed something should be done with Fannie and Freddie, as long as no one, except maybe homeowners, incurred any losses. Fannie and Freddie represent a lot that’s wrong with our government. It became a bipartisan cesspool of corruption, jobbery and incompetence over the past decade, for which every public revelation only led to expressions of surprise by DC officialdom. Most recently Fannie and Freddie became dumping grounds for the worst of the real estate dreck, and that’s saying something.

Fannie and Freddie played a role in the housing bubble. The last couple months the housing market, let’s leave out the commercial market which is worse, has stalled. All the Fed and Treasury blowing couldn’t reflate the bubble, and prices will continue their slow movement down for a very long time. Remember the NASDAQ ten years on is at 40% of its bubble peak, while Japanese real estate, 20 years on, is just over 20% of its peak value, so that leaves at lot downward room for US housing, depending on how big you think the bubble was.

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Most interesting of course is how all the thinking remains quite bubbly. Bill Gross of PIMCo came out and warned last week that without any gov guarantee PIMCO would quit the mortgage market. Mr. Gross’ fund sits on $36 billion in MBS, so he has a definite interest. Even more bubbly was Mr. Gross’ suggestion yesterday that the US government back refinance of all mortgages currently paying over five percent:

Massive refinancing of the nearly 60% of mortgages backed by the government that are one full percentage point above today’s 4.5% mortgage rates would provide quick stimulus “as well as a potential lift of 5-10% in terms of housing prices,” he said.

I suppose a chunk of that is now held by PIMCO and the implicit government guarantee would then be explicit, or better you could just get it off your books, plus free money right? I guess that’s win-win-win. I didn’t hear any idea on what would be done with the 25% of the people underwater in their mortgages. It will be a long long time before real estate in this country heads up, bet on it.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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