Mortgage Rates, Existing Home Sales, And The $1.25 Trillion Dollar Question

Real Estate Broker/Owner

With existing home sales rebounding this past month to the fastest pace since the financial crisis made land-fall in September, it begs the question, was the Fed's monetary policy of purchasing $1.25 trillion in mortgage backed securities worth the cost?

To put this Fed monetary intervention into perspective, it was nearly the size of the TARP and the stimulus package...combined.  And yet despite this, it has not received much attention.  Part of the reason may be because it is not "tax-payer" money, it is new money that the Fed has printed.

The implications of the Fed's $1.25 trillion monetary policy is that rates are going to surge.  It may not happen in 2009, or 2010, but it is going to happen, and when it does, the housing market is going to be in a lot of pain.  Is the current monetary policy only creating another crisis down the road?

As I have written about before, monetary policy is one of the most costly, inefficient, and encumbersome methods in dealing with this housing depression.  On the other hand, fiscal policy is one of the most cost-effective, targeted, and timely strategies that the government has at their disposal.  Unfortunately, Washington has been reluctant to aggressively use fiscal policy to address falling property values, residential nor commercial.  

Here is a look at the results of the Fed's policy on impacting demand for real estate over the past several months.  The first numbers are the seasonally adjusted annual rate of existing home sales according to NAR.  The mortgage rate data is taken from Freddie Mac.  There is very little correlation between lower mortgage rates and increased home sales. 

Sep 2008:  5.10 million sales / 6.04%

Oct 2008:  4.94 million sales / 6.20%

Nov 2008:  4.54 million sales / 6.09%

Dec 2008:  4.74 million sales / 5.29%

Jan 2009:  4.49 million sales / 5.05%

Feb 2009:  4.71 million sales / 5.13%

Mar 2009:  4.55 million sales / 5.00%

Apr 2009:  4.66 million sales / 4.81%

May 2009: 4.72 million sales / 4.86% 

Jun 2009:  4.89 million sales / 5.42%

Jul 2009:  5.24 million sales / 5.22%

The concern is that while home sales have "recovered" to pre-crisis levels thanks to the $1.25 trillion Fed investment, could the same success have been accomplished without it?  To put this into perspective, the $8,000 first time home buyer tax credit will likely only cost the government between $10 and $20 billion

Comments (1)

John Walters
Frank Rubi Real Estate - Slidell, LA
Licensed in Louisiana

Mark just read your article in Realtor magazine.  Very good idea.  Except for one thing.  This current administration isn't concerned about restoring wealth to individuals.  They want to re-distribute the wealth period.

Aug 25, 2009 06:32 AM