by Mickey Levy
It is not just the rapid decline in home prices but the uncertainty about how much further they will fall that stands out as one of the largest negative factors hanging over the economy and financial markets. The current pace of adjustments suggests that uncertainty will begin to abate late this year and early 2009.
Falling home prices increase affordability and are necessary to reduce bloated inventories of houses for sale, but expectations that prices will fall further keeps potential buyers on the sidelines. And this same uncertainty creates havoc in financial markets by driving up credit losses and making it nearly impossible with any degree of reliability to value a sizeable portion of the over $10 trillion of mortgage securities held by banks, investment banks, Fannie Mae and Freddie Mac and a wide array of global investors. This has plagued mortgage markets and pushed up mortgage rates even as the Federal Reserve has eased 325 basis points. A key channel through which the Fed’s monetary easing is supposed to stimulate the economy has been gummed up. Read more