The Bigger Bubble

Recently I’ve been mulling over housing prices and I think it’s entirely possible that we’re in for further decreases in home prices. I could be wrong, but let me throw this out there and see what people say.

In the current political climate, with all the emphasis on having less government intervention, lower government spending, and lower deficits, we could see big reductions in, or the elimination of:

  • The secondary mortgage market as defined by Fannie Mae and Freddie Mac
  • The mortgage interest tax deduction

If this happens, there will be big drops in housing prices. I don’t see a free market coming up with the 30-year fixed-rate no-prepayment-penalty loan. Instead we’ll see shorter terms, higher rates, or much greater fees, which will in turn reduce the number of potential buyers. Especially when borrowers can no longer pretend that the interest rate deduction somehow makes the monthly payment “not much more than rent.”

So what do you think? Will Congress actually man up and kill Fannie, Freddie, and the interest deduction in the name of free markets and responsible governance, or will they continue to pander to the home-owning public and bolster the status quo?