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December 04, 2008

Treasury Trashes Housing Market

The Treasury Department has just executed one of the few maneuvers possible to make the housing problem worse than it is: a preannouncement of possible subsidized rates for new mortgages to take effect sometimes in the future. (story here in the Wall Street Journal which just reports the plan and doesn't predict the consequences).

Suppose you were planning to take advantage of lower prices and buy a home now. You wouldn't if you could possibly help it. You'd wait for the new rates since they won't be retroactive; wouldn't you?

Here's how long you'll wait according to the WSJ: "The plan remains in discussion and may not be made final before the Bush administration's term ends in January." Good way to make sure we don't have any recovery in the housing market on W's watch.

Any product manager or store owner knows you don't preannounce future discounts on products you're trying to sell today. But the Treasury guys come from Wall Street where they may not know that.

So now for sure people will continue to hold off buying houses. That will, of course, be interpreted as evidence that the mortgage subsidy is needed. In fact, when the subsidy is finally applied, there will probably be a turnaround because the preannouncement will have squelched any demand that was building in response to lower prices. The tragedy is that turnaround might have happened sooner and without the subsidy – if the subsidy hadn't been preannounced.

Nice move, guys.

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