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Democrats Are Destroying the Value of Your House
05.01.09

By Penny Wise

 
If the US government and Federal Reserve having spent, lent, or committed $12.8 trillion to combat the recession has you worried about how this massive debt will affect your children’s future, think sooner and closer to, well, your home. This spending spree is already diminishing the value of your house and will drive up interest rates, creating devastating consequences for our economy.
 
Based on this enormous level of federal spending on bailouts and stabilizations programs, mortgage interest rates should be falling, home prices rebounding, and home sales increasing. Yet, this isn’t the case. In fact, home sales and home sale prices continue to drop, while mortgage rates are now holding steady after decreasing earlier in the year. Higher mortgage interest rates are preventing prospective home buyers from entering the market, and the subsequent lower demand for homes is putting continued downward pressure on home prices and values.
 
The Federal Reserve has responded to this situation by beginning quantitative easing, the buying of Treasury bonds and mortgage securities by “creating money at will.” This is similar to a homeowner taking on credit card debt to pay off the mortgage, except the Fed’s credit card has no limit and the Fed can print more money to make the monthly payments. Eventually though, payment is due, even for the Fed.
 
In theory, the Fed’s use of quantitative easing is designed to increase the demand for bonds and mortgage securities, driving these prices higher with a corresponding drop in interest rates. When mortgage interest rates drop, the demand for homes typically increases, thereby increasing home prices. But these are not typical times.
 
Mortgage interest and Treasury bond rates have not dropped, because the Obama administration and Democrats in Congress have created so much new federal debt the Federal Reserve’s purchase of Treasury bonds and mortgage securities has not increased demand for the bonds and securities. Instead of having the discipline to cut deficit spending, which would help homeowners and prospective home buyers, the President and Democrats in Congress just continue to spend more money.
 
Quantitative easing also devalues the dollar, making foreign buyers less likely to invest in US debt and more likely to invest their assets in other areas, such as Australian coal mines and South American oil fields. The Fed’s initiation of quantitative easing has prompted speculation that China, the largest foreign holder of US debt, is beginning to sell long-term Treasury bonds in exchange for short-term Treasury bonds, which would depress demand for long-term Treasury bonds and counter the Fed’s quantitative easing. Ironically, the Fed’s work to stabilize the credit markets by spending trillions of dollars is being undermined by its printing of more money, which is driving away potential buyers of US debt.
 
And more economic storm clouds are gathering on the horizon. At some point, the Federal Reserve will have to sell back the bonds it has purchased with the money it created at will. If interest rates have not come down, which is the case even today, the Fed will lose money because higher interest rates translate into lower bond prices. Even Paul Krugman, who is in favor of the Fed’s quantitative easing, acknowledges there may be a problem when the Fed sells the bonds back at lower prices when interest rates are higher.
 
With this economic backdrop, what lies ahead for homeowners and prospective home buyers? Little good news. Mortgage interest rates have probably bottomed-out and will only increase because the $12.8 trillion in federal spending, loans, and commitments by the Obama administration and Democrats in Congress lowers demand for Treasury bonds and mortgage securities. As mortgage rates rise, potential buyers will qualify for smaller loans. This reduced buying power will place enormous pressure to keep housing prices lower, causing homeowners to see further erosion in the value of their homes. There’s no housewarming gift for anyone in this scenario.
 

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