011 Good Bad & Ugly - Totally Unpredictable Housing Market

Interest Rate Risks

Some cautions.  The Government Sponsored Enterprises (GSEs), like Fannie Mae, Freddie Mac, are securitizing mortgages, currently with government backing. This means that they are guaranteed and so consequently rates remain low because risk is mitigated.  If these GSEs are privatized in any way, through the so-called ‘recap and release’ program or otherwise, this could drive up mortgage interest rates by adding layers of risk to the market by reducing government backing that, in turn, would need to be priced into rates to compensate for the enhanced risk.  Hence interest rates might go up by up to another 1% which could have a severe impact on the already problematic affordability of housing, especially in housing constrained states.

Mortgage Interest Deduction

Another red flag is the possibility that the benefit of the mortgage interest deduction (MID) could go away.  Owning a home has been a bedrock of American society with the idea that one sinks roots into a community, as well as being one of the best forms of wealth building over the long term.  Removing the mortgage interest deduction itself is not something that is being discussed, but by doubling the standard deduction to $25,000 or so, which is being discussed, this could eliminate the benefit of the MID.  This would mean that the MID would only kick in as being beneficial if a homeowner is carrying $650,000 or more in debt, hence a vast swath of the home-owning population across the nation would lose the benefit of the MID because their mortgage debt would not be high enough to matter.  This could dis-incentivize homeownership and, consequently, long term wealth building.