UNDERSTANDING THE COMPLEXITY OF THE REAL ESTATE MARKET AND THE ECONOMY.

How fragile is the real estate market in comparison to the rest of the world of economics, and what does it take to get us back on track to stabilility and eventually growth?

To answer that, we must understand how all the componets work.

The Federal Reserve System and the Secondary Market (FannieMae and FreddieMac)  which is operated under the Government Sponsored Enterprise (GSE), these two entities have a direct influence on our economy. 

The Federal Reserve Systems controls the money supply that influences banks who borrow from them and other banks, short term interest rates, such as adjustable rate mortgages, hybrid type loans.  They also affect consumer loans, home equity lines of credit, construction loans, cars loans, and also has a direct influence on the prime rate charged to the banks best customers.

FannieMae and FreddieMac are operated under the Government Sponsored Enterprise, they're main objective is much like an overdraft protection to a checking account, as a way for the financial community to maintain liquidity in the mortgage market and maintain an equillarium to the credit market.  

This system works well, as the need for mortgage money is forever assisting not only first time home buyers, also move up buyers, as well refinancing home owners, who also benefit from FannieMae and FreddieMac purchasing loans on the secondary mortgage market, this systems provide the flow of monies to the primary mortgage market that conform to their established conforming guidelines. 

Under these guidelines, pools of loans are graded by the types of loans, interest rates, due dates, rate of return etc.  These pools are a mixture of perfoming assets, as well as non performing assets.  These pools are also known as Mortgage Back Securities.  These MBS are often purchased by investors, who may want a certain rate of return on their money, such as a retirement fund, 401K's, etc., in many cases, these pools provide a safe rate of return.

When both these entities are allowed to operate in unison, the economy can maintain growth, keep inflation in check by controlling the money supply. 

So what happened?  Why are we faced with so many problem loans, and really, how bad is it?  Why is the economy in such a mess, and cofidence very low?

Raising short term interest rates 17 consecutive times consecutive and waiting to see what was going to happen took a tremendus toll without counter balancing the fed funds rate could have soften the landing of home prices losing values. 

A changing of the guard with the Federal Reserve Chairman Ben Bernake taking over, and delaying of taking action to restore order.

The last piece of the puzzle is a mechanical part of the process, by that, raising the conforming loan limits that allow the secondary mortgage market to provide liquidity in states that are considered high cost states, like California, and New York to name a couple.  

As an example, When you make it difficult for home buyers to buy, whether they are first time buyers or not, refinancing or move up buyers, you restrict the flow of money, this is the life blood of the economy. Like turning off a faucet that flows water to the things that grow, without it, it can not grow, it dies.  That's exactly what happened. 

Look at what a slow down of the real estate market actually does, if a person can not sell, buy or refinance, this ulltimentally filteres down to national level, as well as a state level.  look at states like California, who depend on property tax revenues for everything, schools, health, and other services.  You can't run it efficently without the flow of money. 

Subprime was just the source of the fuel, Monitary policy, in effect was the match that lit the fire.  The Federal Reserve is now taking a pro active stance, Congress finalally understand part of the problem, by raising the Conforming Loan Limits, now it's up to the consumers to take advantage by looking at the opportunity that now exist.  

Homebuyers have a short window of opportunity to buy now with attractive rates and lower home prices, it won't last long.  This was a mechanical correction, that needed to be done 18 months ago, .... it's a SHORT TERM GIFT OF OPPORTUNITY TO BUY NOW.