There has been a definite slump in the prices of houses for sale. This has been compounded with a tendency this year for the dollar to go down some 11 percent this year in relation to the Euro. Some economists are worried that a high level of foreclosure of homes could also cause a financial crisis at the two big agencies that buy mortgages, Freddie Mac and Fannie Mae. Home foreclosures are up 53% compared to the same time period in 2005. This is bound to create some real financial problems down the road.

Banks are able to continue to supply mortgages to consumers because their mortgages are sold to Freddie Mac. Freddie Mac buys home mortgages from banks and sells them repackaged as securities, which are sold to investors. The stated mission of Freddie Mac is to stabilize the mortgage market and make homeownership possible and opportunities for rentals. There has been some concern at Freddie Mac for the extension of a real estate bubble since 2005, since Freddie Mac noted that large amounts of cash were being taken out of home values through the refinancing of second mortgages on houses that had been revalued at much higher than their original purchase prices. Due to the fact that Freddie Mac and its sister organization are heavily in the real estate market themselves, they have continued to make optimistic predictions about the housing market. In late 2006, their predictions are that we have seen the worst in the fall of housing prices, and things can only look up.

Despite all the happy talk, there have been recent warnings of a sudden fall in the real estate market and in the value of the dollar itself. Robert Rubin, the Treasury Secretary under President Clinton, and Paul Volcker, Federal Reserve Chairman from 1979 to 1987 have warned that something must be done or else foreign investors will pull their money out of U.S. investment and cause a continuing fall of the dollar.

Due to the way the real estate and mortgage market is structured, this could have a profound impact on the real estate market as well through higher interest rates. Mortgages have been reorganized into Mortgage Backed Securities (MBS), which are then sold as derivative securities to investors all over the world. Rubin and Volcker have been pointing out that the U.S. Government needs to cut its yearly budget deficit, or else foreign investors will begin to dump dollar-denominated investments.