Government housing intervention may have created a false bottom in the market, Goldman Sachs says

October 26, 2009 10:00AM

National housing prices are 5 percent higher than they would have been without government interference, Goldman Sachs said in a report released Friday. Between tax credit incentives for first-time homebuyers, artificially low mortgage interest rates, and foreclosure moratoria, the government may have created a false new demand for housing that won’t last, according to the report. In many cases, loan modifications only delay foreclosure, rather than prevent it, the tax credit that boosted home sales by an estimated 200,000 units will soon expire, and the mortgage securities purchased by the Federal Reserve, which have thus far held interests rates at their current low, will be phased out in the first quarter of 2010. The Goldman report predicts a decline in home prices of 5 to 10 percentage points over the next two quarters, and warns that legislation aimed at slowing foreclosures in the short-term may create a long-term dilemma. “The tradeoff would come later, when many of the properties eventually make their way back onto the market through foreclosure,” the report said.