Over the weekend, Fannie Mae and Freddie Mac were nationalized. Over the last couple of months it was widely thought that this would be unavoidable, however it still came as a shock that it happened so soon. Looking at the home price indexes that are published by the The Office of Federal Housing Enterprise Oversight (OFHEO) which oversees Fannie Mae and Freddie Mac, it is puzzling that such a small decline in values could bring the two large institutions to their knees. The monthly OFHEO purchase only index is down only by 4.8% year over year. The S&P Case Shiller National Home Price Index is down 15.4% year over year.
Last May I compared the OFHEO Home Price index and the S&P Case-Shiller Home Price Index in this post. There are four major differences between the OFHEO index and the Case-Shiller index. The first is the geographical makeup. The S&P Case-Shiller National index covers about 70.8% of the U.S. Real estate. The second difference is the OFHEO index looks at both purchases and refinances whereas the Case-Shiller index only looks at purchases. However, the OFHEO does issue a purchase only index. The third difference is the OFHEO index discounts homes that have lengthy intervals between valuations more than the Case-Shiller index does. The final major difference was the loan types. The majority of ARMs and interest only loans were financed outside of Fannie Mae and Freddie Mac. I also showed how the OFHEO index tends to lag the Case-Shiller index by about 6 months. This is could be due to the fact that a typical appraisal may have comparables that are 4 to 6 months old by the time the loan closes but could be up to 10 months old.
This chart looks at home prices going back to 1890 adjusted for inflation. It also shows how the CME Futures market is pricing how the home price index will look like in the future. It appears that we are about half way through the housing crisis. The first half of declines has dramatically changed the financial landscape. It remains to be seen what the future will bring, but I foresee a huge burden to the U.S. taxpayer.
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1 comment:
It appears that we are about half way through the housing crisis.
That sounds about right. Further, I think actual price drops will be more muted going forward. Inflation (currently >5%) will do a lot of the heavy lifting.
The fed's reflation tactics appear to staving off a natural price asset price correction yet again. The cost to the majority is huge though as incomes are trailing inflation.
The asset inflation economy continues - at least for now.
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