I am sure you saw the housing numbers today, they were through the roof, no pun intended, and the talking heads were perplexed why the market did not like them. Again, it comes down to looking beyond the headline numbers which, surprisingly enough, traders are starting to do. All the action is in the lower priced homes or starter homes and almost all of the financing is being done through the FHA, and the USDA, see my previous post about that odd couple.

Essentially, the low or no money down mortgages are back and being financed by you and I through our tax dollars, I am a giving guy, but this is a bit ridiculous. I absolutely love the idea of a 3.5% down payment with a 31% debt to income ratio, a slightly weaker credit score than the normal and the ability to use that tax credit for the down payment it just makes sense because it’s not like we have ever seen this story blow up before. I hope that we see the FHA start loaning out even more than the value of the house, maybe 120% LTV so the new owner can furnish or renovate the property that would be great! Oh, wait they are doing that, fantastic.

Is there any question that the FHA will more than likely have to bailed out again to the tune of $54B according to some whistle blowers? Guess who dismisses the same folks who gave their stamp of approval on Freddie and Fannie, so I guess we have nothing to worry about. Essentially, without all of this government intervention we would have little activity in the housing sector and the proof of this is right in front of us, just look at the action in the $250K plus market, it is dead.

The average price of a home dropped, MoM, from $177K in August to $174K in September, but YoY it looks grim with a 9% drop from $191K to $177K with sales booming prices are dropping, that would make my economics professor scratch his head doubting his supply demand charts. Foreclosures are keeping the prices down, but with housing supplies drying up by 7% and total inventory dropping to 3.63M there is no reason for prices to be declining, right? There is a major problem and it is called the shadow inventory that banks are holding on to and the people know it is there. That is why prices are remaining low plus you have builders who have been recklessly pouring concrete trying to pretend they have buyers which have been adding to supply, not good.

Add fraud on top of the tax credit and we get a real mess on our hands and a perfect reason to let the market work itself out. Isn’t it bad enough that the banks received hundreds of billions and trillions in bailouts and cheap money, but now the taxpayers are being cheated by, well, other taxpayers? Chris Dodd, in an effort to save his Senate seat, is attempting to extend the tax credit to June 30, 2010 and expand the tax credit to all Americans for an additional expense of $16.7B. I guess we will have cash for socks in the near future, who knows, but when you have spent a trillion dollars to create no jobs what is another $16.7B in another failed policy?

As long as the government keeps interfering the longer the pain will continue and there are serious problems in housing as Whitney Tilson keeps pointing out, correctly so I might add. As the Wells Fargo earnings showed, there are major problems in the housing numbers, please see my notes on those earnings. We got option ARM’s, jumbo’s and a host of other real estate issues all about to explode on the scene which will drive prices lower, not higher. Let the market work because the lower the process go the better of the buyer will be and suckering them in at higher levels does no one any good except maybe the banks, but I guess when the banks finance your elections you need to keep them happy.