$300 Billion

The Federal Reserve's summerlong initiative to keep mortgage interest rates low was a stunning success. By buying mortgage backed securities at incredibly high volumes, it simulated high demand. High demand kept the interest rates on those securities low. That meant people buying this summer were able to finance at historically unprecidented interest rates in the range of 4.5 to 5.0%.

Low interest rates meant that home buyers could place bids with a higher principle. This helped keep housing prices inflated. A key part of keeping housing inflated is making sure there are buyers who can bid inflated prices. If the Fed hadn't stepped in, interest rates would have risen and prices would have crashed harder.

Well, $300 Billion have been spent. The program is over. Mortgage rates should start rising.

I was surprised this past summer to not see as much price depreciation as I had anticipated. I didn't quite realize what was going on.

Irvine housing blog spent the week discussing various aspects of what to consider in a house purchase. Tuesday's post showed a table of interest rates vs principle that can be bid on a house given a fixed monthly payment. Going from a 5% interest rate to an 8% interest rate causes a 26% drop in the price of the house.

Can you imagine that? Save up for years until you have $100K to make a down payment on a $500K house, and after 2 years you're 6% under water? Consider that if you'd had all your money in the S&P at the height of the stock market in 2008, you would only be out 30%. That's still 70% remaining. 70% sucks, sure, but it's way better than -6%. SeattleBubbleBlog does a much better job making this point. Except the point The Tim made is to compare buying in 2007 vs investing in 2007. The point I want to make -- or rather to summarize from others -- is that there's still that much loss waiting! Buying a house now means you will be under water on that house in 2 years.

$300 Billion. Was that a good use of taxpayer money?