The Federal Government chose an interesting time to push for a greater role for Private Capital in the housing market. The rising interest rate environment created by the capital market’s “Fed Taper Tantrum” was hardly the most conducive to Private Capital investment; however the Government seemed oblivious.
No doubt the Government remains fixated on the booming housing market[i]; and believes that Private Capital just can’t wait to take a greater role. Prices are now rising as fast as they collapsed when the bubble burst. The National Association of Realtors suggests that even rising mortgage interest rates are forcing buyers into the market, to lock in their costs[ii]. It just looks like win-win. Fundamentally, the picture is not as strong as the price action suggests. Housing demand and economic growth are being sucked forward from the future to the present, just as was the case between 2005 and 2008.
To capitalize on the current strong demand, the Government is bringing forward its exit plan from the housing sector. Plans are therefore being advanced for Freddie Mac to reduce its footprint; in an initial trial of the issuance of bonds that share the risk on the underlying mortgage with private investors[iii]. The bill to reduce the footprint of the GSEs simultaneously hit the floor of the Senate[iv].
Private Capital may however be a little more circumspect after the “Taper” was signalled. In addition, there is a developing risky dynamic which has been flagged as the “payment shock” by Moody’s[v]. In effect, borrowers who took out Home Equity Loans at the height of Bubble have been paying interest only. Between 2015 and 2017, they will have to start paying principal amortization, which will effectively double their monthly payments. Anyone who has positive equity when this occurs is well advised to consider selling. 2015 has been identified by many Fed Watchers, as the time when the QE Exit occurs. Having seen the havoc that the mention of the “Taper” has caused, one can imagine the carnage in 2015 when the monetary tightening is for real. Perhaps they should consider selling sooner whilst prices remain strong.
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