I know I must be sounding a bit different here than in many of my other posts, where I have been consistently warning about the dire economic implications of America's housing bubble, but your own link notes that just slightly more than 1.2% of Fannie Mae's single-family home loans are delinquent. True, that percentage has been rising, but even if it were to rise to the level of 5% (which would be rather shocking), that would still mean that 95% of Fannie Mae's loans are well-performing loans. Thus, I simply do not comprehend the claim in the NY Times article which says:

It would most likely make it more expensive for the United States government to borrow money in the future, since the government's potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion.

LeRoy: I do believe that a Fannie Mae/Freddie Mac bailout would make it more expensive for the U.S. government to borrow money in the future, but to say that the "government's potential obligations...would rise by an additional $5 trillion" makes very little sense to me. Again, that could only happen if 100% of the Fannie Mae and Freddie Mac loan portfolio were to go into foreclosure. No one is expecting that to happen. (Not even close.) As you know, I question the often repeated claims that the national debt stands at about $9.6 trillion. I say it is much larger, because the government is not properly accounting for obligations the government has undertaken which are not 'potential' but are very real, namely, our Social Security and Medicare promises. If a government bailout of Fannie Mae and Freddie Mac cost in the neighborhood of $750 billion, which I think is a much more reasonable estimate, but still toward the upper end of the worst-case scenarios, then the national debt would rise by $750 billion, not by $5 trillion. That is still bad, very bad indeed, but not catastrophic.

However, it probably would have a catastrophic impact on global perceptions of the fundamental soundness of the American financial system and on the integrity of our financial institutions, which could have severe 'knock-on' effects, going beyond the to-be-expected increase in the cost of further and future borrowing.

With the seizure of IndyMac, yes, the real estate market is in effect being at least partially nationalized. I do not regard that as a good thing. It again means we are privatizing the benefits and socializing the risks of real estate ownership.

Which is why I have been deploring the housing bubble all along. A lot of what has been happening seems to have been utterly predictable to me. I am going to add some verses to my 'Fable of Loony-Land' to bring in the housing market and all the shenanigans that have been going on. Sample:

The Loonies bought houses with no money down,

And interest-only loans!

With adjustable rates, which sealed their fates,

And left them homeless clowns!

[Well, it still needs some work.........]

I hear what you're saying, and agree also with your analysis of possible knock-on effects. Some outfit just came out with a $1.6 trillion estimated loss for the banks/securities dealers/mortgage people. With the money multiplier, that could equate to a $16 trillion shrinkage in credit, which would be highly deflationary. Of course, the Fed would inflate like mad, but most of that money would go into commodities and into the SWFs of friends like Abu Dhabi and other oil exporting nations--who might not bail out our banks (they may be rich, but they're not stupid).

To arrive at the $5 trillion of increased debt, did the NYT assume that the government would have to purchase the mortgages outright?

I have long been fond of quoting MSN's Fleckenstein, who says, "All roads in democracies with fiat currencies lead to inflation". I have long feared that because 65% of Americans are homeowners, and they are like 75% of the voters, that the Faustian Bargain would be a worthless currency in exchange for saving their bacon. Yes, they got all the tax loopholes the government could throw at them, and now the nation will collectively have to bail them out, which mainly means the 35% who are renters.

They're doing very well these days.

Your quoted figure of $1.6 trillion sounds about right for the initial loss of household wealth in America as a consequence of the bursting of this bubble. I heard $1.2 trillion a few months ago, but things have gotten worse since then. If this does indeed cause the credit markets to freeze up (in spite of all the strenuous efforts by the Fed to prevent that from happening), then, yes, we are looking at a depression scenario.

As of a few months ago, I was thinking that housing prices would reach their nadir sometime in 2009 (perhaps late 2009) and would then stabilize or even perhaps begin a very slow move back upward. Thus I was thinking that summer of next year might be a good time to buy a townhome. But I am now thinking that the housing market is going to be in the dumper for at least the next several years, and probably won't bottom out until 2012 or so. And it might be very hard to get a home mortgage loan then, if things continue to worsen, even with near-perfect credit.

What a mess Bush/Greenspan/Bernanke have created.

I know someone who's teaching in Saudi Arabia. He doesn't like the teaching environment and the total lack of things to do, but he likes the money. Great place to save, as there's nothing to spend your money on. Free housing is provided. Could be a hot spot, though, if an Iran war gets going.

I don't think you should be in a hurry to jump into a townhome. Prices will probably be falling for several years, or at least take several years to bottom out. Of course, if Ben really steps on the accelerator...nominal prices could rise, but I think gold would rise faster. There are better places to be stuck than real estate. True, there are the tax advatages.

Genedio advises: I don't think you should be in a hurry to jump into a townhome. Prices will probably be falling for several years, or at least take several years to bottom out. Of course, if Ben really steps on the accelerator...nominal prices could rise, but I think gold would rise faster. There are better places to be stuck than real estate. True, there are the tax advatages.

LeRoy: I wouldn't view the townhome as an 'investment' or as a way to get rich, which is the terrible mistake that so many Americans have been making--to view their home as their 'retirement plan'. I would view it as a place to live.

Right now, I am living in a smallish two-bedroom apartment of about 800 square feet, and I am getting cramped. The kitchen is probably only 60 square feet. I have no garage, and have gotten very tired of having to scrape the ice off my car every morning perhaps 100 days out of the year. This apartment is about a mile away from my school; I could walk, but the round-trip walk would chew up about 40 minutes of my day, and I just don't have that much 'spare' time during the school year. There are some lovely townhomes almost right next to my school; if I bought one, I could walk to school every day (and save on gas over the long run). I could rent a townhome with a garage; there are some about 2.5 miles from my school, but they rent for ~$1200 a month. For that much, I could buy a townhome right next to the school on a 20-year fixed-rate mortgage (probably). Right now I am paying about $800 a month in rent, and as Phil likes to remind me, that money is going down the drain. Why not spend $1000 or $1200 a month, have more living space, be building up some equity, and be the master of my own castle? My current apartment is so small that I am sleeping on my (very comfortable) sofa in my living room. My 'master' bedroom is being used as a study, which I definitely need. My second (tiny) bedroom is being used as a den and storage area. The townhomes next to the school are more like 1300-1600 square feet, which would almost double my living space. [I am lucky the school allows me to store most of my considerable collection of books in my classroom.]

Since I just signed a 12-month lease on my apartment, I will be waiting until at least next summer, and may wait one more year after that (for prices to fall)...but probably no longer, just on quality-of-life considerations.

LeRoy, if townhome prices have already fallen substantially in your area, I'd consider it, as you have a very secure job. Nobody wants to buy an asset only to watch it fall in value by tens of thousands.

The issue seems to be that your apt. is too small. You could rent a larger apt. or buy a townhome for the equivalent monthly payment. (I wonder why in California it still costs so much more to buy than rent?) The old rule of thumb was that a home should cost 10-12 years of what it would rent for. In California make that 15-20. (The same is true out here, oddly; I've seen places offered for sale at 30 and more years' rent).

When you compare, you should do a full accounting. You say you now spend $800, and could rent or buy for $1,200. But then you couldn't be saving $400 a month.

If buying, the amount you save on taxes would be fairly miniscule, thanks to the top-heavy tax benefits they give to the affluent. If you think your mortgage, property tax, insurance, homeowner's dues and PMI together would equal rent on a comparable place, go for it. I'd especially go for it if you could save up a 20% down and get the PMI waived.

Unless he has a 30 year lease (unlikely), I think that Leroy has to make the comparison using a realistic projection of the rental on a given apartment (or maybe an alternative one if he planned to move as an option) over the life of his ownership of the property (which could be either more or less than the length of the mortgage) and an equivalent projection of all the costs of the property (presumably the mortgage interest, which is probably the largest component, would be falling throughout the period) and use that as a basis of decision. He might also consider trying to project the growth in property value over that period. I don't know that there are any 30 year stretches in our history during which property didn't increase in value (as measured in dollars, anyway).

Leroy is in his 50s and may not want to remain in his townhouse for the next 30 years. He claims he's not interested in appreciation of his investment, but the fact is, many people sell long before their mortgages are paid. I heard somewhere that the average person moves every 7 years. Assume he moves in 12 when he's 65. I think his average rent over the next 12 years will about equal his average cost of owning after taxes; that is, the total of PITI and dues after tax. In California, rent would still be considerably less than net after tax PITI plues dues (or repairs) for a 12 year period--even at the highest income tax brackets. Leroy is not in a high tax bracket, and will save piddly in taxes. What could make the difference for him is inflation and housing appreciation. The way this nutty govt. is operating, we could get a lot of inflation down the road, but then I'd also expect much higher interest rates--which would squelch appreciation.

I guess I was overgeneralizing - Leroy is (you too, I guess) an embryonic elder at that.