Tuesday, August 26, 2008

Some Good News For The Housing Market Courtesy Of Freddie Mac

In a bit of bright news for the ever-gloomy housing market, Freddie Mac’s debt sale yesterday went better than planned. Freddie was able to sell $1 billion of 3 month bills and $1 billion of 6 month bills with relative ease, according to Reuters. This debt sale went over much better than the company’s last offering earlier this month, despite all the talk about a possible nationalization. This is great news for the real estate market because a poor showing at this debt offering would have led to higher mortgage rates for borrowers, which would have led to even more pressure on the floundering market. Fannie Mae’s debt offering is scheduled for tomorrow, so we shall see soon if they share a similar success.

Personally I have not been very high on Freddie Mac or Fannie Mae, and while it is a good sign for the companies that their debt offerings are still attractive, It does not cure the bigger problems plaguing the companies. The own a lot of mortgages on properties that are losing value. If values don’t correct soon, then they are going to face a huge number of defaults. I think we’ve seen pretty clearly that when people are upside down on their houses, they lose the incentive to pay their mortgages. The trend of how many people are going under is alarming, as evidenced in yesterday’s post about underwater homebuyers.

As long as the companies can continue to sell their debt at cheap rates, they should be able to weather the storm. The question is, how much longer will investors be willing to buy their debt? It is certainly encouraging for the companies that investors seem as confident in the debt offerings as they are despite the negative publicity, as this latest offering has shown. Investors must be under the assumption that the government will step in and save the companies if need be while still honoring each company’s debt obligations. The majority consensus about financial minds seems to be that if the government ends up nationalizing the companies it will indeed honor the debt, but would probably wipe out shareholders.

The result of this latest debt offering was definitely a positive for the housing market, but we will have to see if investor sentiment remains strong through the next wave of bad news.

1 comment:

google said...

nice way to end a good article. Doom and gloom Debbie downer writers should move on or be econimist not writers.