[quote=SD Realtor]No scaredy the price of credit has nothing to do with the expectation of housing prices. The price of credit drives housing prices.
The price of credit is ultimately, when you trace it back up the chain, is driven by the bond market. Yes risk is inherent in the price of credit but if credit were really determined by risk then in 2007 when we first started seeing spiraling defaults credit should have skyrocketed but it did not because the dominoes would have all fallen, rightfully so I might add.
So we have punted the risk from the consumer past the lenders, and now it is at the federal level. One would think it stops there because our creditors are foreign govts now. It should and we will see.[/quote]
Have to agree with scaredy on this one.
Interest rates were held too low by the Fed, and they were also held too low via credit default swaps. Note that when interest rates **should have risen** (in the 2005-2008 period, when people in the financial industry started getting scared), the CDS market took off like a rocket. This gave bondholders/debt purchasers a false sense of security, so the risk was not priced in the bond market — you saw it in the derivatives market.
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Some of us would indeed argue that debt that is not self-liquidating should not be freely available; and when it is, it should be fairly expensive to account for the risk.
If we want a mortgage market, the govt should not be involved in setting interest rates, either through direct/indirect guarantees, or direct lending. Again, this causes the mispricing of risk, and the private market will never be able to compete without taking on far too much risk.
Also, if they want to avoid walk-aways when prices depreciate, they need to mandate 20% down payments (at a minimum). This forces the borrower to take first-loss position, and will deter them from walking away.
