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Dick Bove: Housing Market Will Fall 10%-15% When Fed Stops Subsidizing Home Prices

Posted Mar 19, 2010 10:09am EDT by Henry Blodget in Recession, Housing
Related: xhb, tol, len, kbh, ^dji, ^gspc

For the past year, the Fed has been buying mortgage-backed securities in an effort to keep mortgage rates low and provide some support to the housing market.  On March 31, the Fed says, it will stop buying mortgage-backed securities.

So what will happen to mortgage rates and house prices?

No one knows, says Dick Bove, the wise and fearless analyst at Rochdale Securities. 

No one knows what mortgage rates would be if the Fed weren't subsidizing them.  No one knows where house prices would be if the Treasury and other government agencies weren't modifying mortgages and trying to bail homeowners out.  No one knows what would happen if taxpayers weren't funding tens of billions of dollars of losses at bankrupt Fannie and Freddie to provide yet another housing subsidy.

Even if the Fed stops buying mortgage-backed securities at the end of March, Bove says, some of the impact of the subsidy will still be felt through June.  Also, for a while at least, Fannie and Freddie will continue to buy mortgages.  So there won't likely be a sudden change to the housing market or mortgage rates.

Over the longer term, though, we'll begin to find out where house prices would be if the housing market were less subsidized.  And Dick Bove expects that that level is 10%-15% below today's prices.

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