By ANDREW JEFFERY

This post first appeared on Minyanville.

Treasury Secretary Hank Paulson is hoping he’s found the magic bullet to solve the US housing market’s seemingly never-endless woes.

He hasn’t.

By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% – well below the current market rate of around 5.75%.

Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.

According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes.

In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments – the lower rate amounts to savings of $150 per month on a $200,000 loan — precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.

Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.

This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.

The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.

By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.

These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.

The silver lining — for those brave enough to uncover their eyes and look – is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.

A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.

Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.

According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day – especially when the epicenter of the economic calamity can be found at the southern tip of the island.

Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”

Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis.”

And when New York City real estate goes, it goes big.

The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.

The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.

As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.

The longer credit markets remain under duress — and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts – the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.

What goes up, must come down.

The S&P/Case-Shiller home price index is out today, showing a continuation of the downtrend in property values. Data from August — two full months before the financial crisis spun out of control — shows weakness across the country:

• Prices fell in August for the 25th consecutive month
• Prices in 10 major markets plunged a record 17.7% year over year
• The biggest declines in August were seen in San Francisco (-3.5%), Phoenix (-2.9%) and Las Vegas (-2.4%)
• The biggest declines year over year were seen in Phoenix (-30.7%), Las Vegas (-30.6%) and Miami (-28.1%)
• No metro area showed a price gain in the last 12 months.
• The best performing metro areas in the last 12 months were Dallas (-2.7%), Charlotte (-2.8%) and Boston (-4.7%).

Data continues to show that home prices are not approaching a bottom. Also, since contracts signed in the past month for home sales will not show up in the data until early next year (1-2 months escrow, 2 months lag in reporting), it’s pretty safe to assume data will be bleak for the foreseeable future. Calls for stabilization, especially after yesterday’s “better than expected” new home sales figures are premature.

The continued drop in home prices is further evidence that when considering buying a home in this market, one must be prepared to live there for at least five years. Trying to pick the bottom is a dicey proposition for everyone but the most savvy, well-capitalized investiors.

Most anyone who has bought a home in the past few months (or even years) has likely lost money on his or her investment. Add in the effect of leverage, and losses will be quite severe if homeowners are forced to sell.

It’s important to understand that the Case-Shiller index is not released by Realtors or Homebuilders, spinning data to try and persuade people it’s time to buy, or that Congress needs to increase handouts to prospective buyers. The data is simply produced to evidence the prevailing trends, in whichever direction they may be headed.

Finally, keep in mind that data from the “San Francisco” metro area, for example, includes data from the entire Bay Area. This means Oakland, Brentwood, Vallejo and other hard-hit cities are lumped together with Palo Alto, Hillsborough and other cities that have held up rather well. Attempts to make generalizations about homeowners in a particular area based on this data is misguided at best.

The San Diego Union Tribune reports that San Diego home prices have fallen over 25% in the past year, reaching levels not seen since mid-2003. The median home price in San Diego County now sits at $370,000. Monthly sales volume is down 12.3% from this time last year.

These numbers are a stark reminder of how bad things have gotten in the residential real estate market. Many brokers, television personalities and media outlets are hailing the drop in prices as a once-in-a-lifetime opportunity. Conventional wisdom says its a buyer’s market.

Nothing could be further from the truth.

The downward trend in prices these numbers represent is still in full swing, and the underlying forces that caused the downturn show no sign of amelioration. Foreclosures are still occurring at rates not seen for 20 years, meaning that real estate markets will remain flooded with bank-owned properties for the foreseeable future. Lending practices are tight and will remain as such as banks continue to lose money on their loan portfolio’s and other real estate investments.

Only those fortunate enough to have saved a sizeable down payment will even be able to consider a home purchase. These conditions alone mean supply far outstrips demand in most markets around the country.

What does all this mean for anyone thinking about buying a home but without any compelling reason to do so immediately?

Wait.

The bottom has been wrongly predicted for months, with each successive group of brave buyers wading into the market, only to be upside down the moment they receive their keys.

It is impossible to call the bottom and predict when home prices will return to a more natural, upward projection. But what is certain is that this “bottom” is many months away at the least, and with the exception of a few well-connected and well-provisioned investors, now is certainly not a buyer’s market.