The Government continues to argue that it must manipulate mortgage rates lower to prop up housing prices.  This assertion is in defiance of the reality that those interest rates are near all-time, historical lows and have fallen consistently for 25 years.


The Reality and Cost of Risk

Housing in the United States has never been riskier based on the quantification/qualification of volatility, and the current perception of real estate held by homeowners and potential buyers.

• Prices are falling nationwide for the first time since the Great Depression 
• Prices are declining at the most rapid pace on record
• Perceived risk of homeownership is at the highest level since at least the 1930s 
• The expectation for future home price performance has never been worse on a national basis
• Housing has never been more leveraged with Home Equity approximately only 40% to total asset value
• Foreclosures are at a record high and inevitable in large numbers through 2012
• Unemployment, the primary determinant of foreclosures historically, is at a 25 year high and rapidly rising 

Yet the 30-year mortgage rate is at a near record-low because it is being subsidized by the Federal Reserve, Fannie Mae, Freddie Mac, HUD, the FHA and countless other GSEs. 

In the context of free markets, the higher the risk (volatility and chance of price decline):

• The lower the corresponding asset value
• The higher the cost of financing (higher interest rates)

Home prices are falling rapidly partially as a result of the realization of increased risk, high volatility and negative expectations.  Were the mortgage industry a free market, the 30-year rate would have risen materially with the recognition of economic reality.  

How long will/can the Government keep mortgage rates disconnected from the reality of the Housing Collapse?

How high would mortgage rates rise if they were determined by the market?

What would happen to housing prices at market-determined mortgage rates?