How Do You Fix the Housing Problem?
Saturday, January 17th, 2009
So many plans!
Tax credits? Reduced cost mortgages? Halt the foreclosures? There are lots of proposals floating around the halls of government today on how to fix the housing problem. I guess the best news is that people are talking about fixing the housing problem. Economists have been quoted over and over again regarding the need to fix the housing problem. Are we finally ready to do something about it?
The National Association of Home Builders put forward a proposal in December. Their plan is called the “Fix Housing First Stimulus Proposal”. The salient points of this plan include: 1) A Homebuyer Tax Credit, and 2) A Mortgage Interest Rate Incentive. They anticipate the impacts from this plan would increase home sales by 1.1 million in 2009. So, how does the plan work?
The Homebuyer Tax Credit would provide the purchaser of a principal residence, an income tax credit between $10,000 and $22,000 (based on local home prices), which could be used as part or all of the down payment for the purchase. There are some restrictions based on the buyers income and the purchase would need to be made during 2009. But, the credit would be real, and would not have to be repaid (unlike the tax credit plan approved in early 2008).
The Mortgage Interest Rate Incentive would create a program to provide 30-year fixed mortgages available to purchases of primary residences at an annual rate of 2.99% or 3.99%, based on the timing of the purchase. The 2.99% rate would be available for purchase through June 30, 2009. The 3.99% rate would apply to purchases from July 1 to December 31, 2009. For a purchaser of a principal residence at the 2.99% rate, the projected savings would amount to approximately $275/month or $3,300 for the first year.
The NAHB analysis finds that a stimulus plan offering these benefits would create approximately 539,000 jobs, $26 billion in wages and salaries, $21 billion in business income, $14 billion in federal tax revenues and $4 billion in state and local tax revenues. A similar program was successfully used in the 1974-1975 US economic recession and helped turn the housing market around.
Dr. Kenneth T. Rosen, Chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, has also taken a look at the issues and wrote The Housing and Mortgage Market Problem: A Set of Policy Options to be used in the public debate over housing stimulus plans. Dr. Rosen believes “the housing and mortgage market problems are at the core of the economic issues facing the Amenrican economy.” He also says that “solutions to these problems must be key parts of any economic stimulus package.”
Dr. Rosen points to the mounting foreclosure crisis, the continuing fall of home prices and the collapse of new housing starts and sales as the three major problems to be the focus of any economic stimulus plan. His analysis and explanations of these problems goes into great detail. His conclusions are similar to those of the NAHB’s “Fix Housing First Stimulus Proposal”, with one significant addition. Dr. Rosen proposes the declaration of a moratorium on foreclosures for 6 months and a bold program for refinancing troubled mortgages to keep them out of foreclosure.
Along with a lower interest rate, a reduced downpayment option and a tax credit plan, similar to the NAHB proposal, Dr. Rosen believes an economic stimulus pacakage with these benefits will enable “millions of Americans to avoid having to lose their homes and jump-start new home construction…” while preventing the “future meltdown of our financial markets.”
These are two of the proposals for a housing stimulus package being discussed in Congress. Where it goes from here may depend on you. As with most legislative efforts, congressional representatives are interested in their constituents’ perspective. Do your part. Call or write your representative and tell them to fix the housing problem now!
Steve,
Why are builders not building homes for Baby Boomers who want to downsize into a nice, high quality, single story home? There is almost nothing new near the north county (SD) coast. I talk with many folks my age (60’s) who would like to have a single story, 3 bedroom, approx 2400 sq ft home on a decent size lot. There is little to be found like this. Almost nothing new or near new.
Jim
Although the cost would be significant, I’m in favor of loan modifications. If we don’t stop foreclosures, I don’t believe lower interest rates or tax credits will help enough (although they will help some get into a home).
The Fix Housing First Proposal will help get things going in the right direction and does offer strong support to home buyers. As you mentioned, a similar plan worked well in 75 and beyond; actually had years of lasting results. I looked into it and one major difference from today and the 70s is that during that time our nation enjoyed really low foreclosure rates and the stock market (in 75) showed gains. The unemployment rate was a tad higher though and interest rates were too, so it’s a toss up…
I think talking about it and taking action towards something is the right thing to do. I’m for the plan 100% (needed to be passed years ago) just wish it included loan modification terms, but that was already supposed to be addressed with Hope for Homeowners (summer) and TARP.
[...] his experiences with his blog readers. For example, Steve has recently written a post titled How Do You Fix the Housing Problem?; which discusses the various proposals put forth intended to mend the housing crisis. What makes [...]
Hi Jim,
The reason builders are not focused on single story homes in North County Coastal regions today is simple. We are all trying to stay alive.
The inventory of available new homes and the number of new home communities continues to drop in San Diego County. This is bad news for the buying public and bad news for builders.
The good news is that some of us are planning for the future, when times will be better. Brookfield is planning a new community in Carlsbad that will include single level homes. The community is called Foothills, and it is located along the north side of Cannon, just east of El Camino Real.
We hope to be out there this summer with more information about our new home products. We will have three single level plans and three other floor plans that will live on the first floor and offer secondary bedrooms or bonus rooms upstairs.
Please watch our web site for more information.
Thanks for the question,
Steve
Hi Jayson,
I agree with your comments. We need to do something to get the foreclosure fiasco under control. That is where Dr. Rosen’s proposal makes sense to me. We still need the stimulus. Lower rates for mortgages and tax credits will certainly help. But, we need to stem the flow of foreclosed homes, or the market will never get an opportunity to go back to work.
Steve
These current economic times are troubling at best; the road out of this situation is to get disposal income into the hands of the consumers… stat!
Much of this cycle started with the sub-prime mortgage debacle, coupled with the home buying / speculation, that resulted in a vast difference, and devastating impact, between property “Book Value” of the banks and “Market Value” of the consumer.
So here’s a plan that would work… use the proposed Federal funds to do two things:
1) Pay down the difference between Book vs. Market Values of homes, across the board
2) Buy down mortgage rates to 3% across the board (15, 20, 30 & 40 year terms)
Here’s how it would work…
1) Pay for all closing costs, including property re-appraisals
2) Cover the difference between the Book Value so as to equal Market Value
3) Allow initial “down payment” on the original mortgage to remain in place
4) Initiate a new mortgage, at 3% Interest, based on the new Market Value less the original “down payment” amount
5) Where applicable, cover the difference of down payment, or simply waive, the need for Mortgage Insurance
6) Where applicable, include home equity loans so as to form a single mortgage “bundle”
Here is an example:
A homeowner bought a home for $300K, put down 10% ($30K) and had an ARM loan, which is now at 7%
This results in a $270K mortgage @ 7% plus PMI plus property taxes result in a monthly payment of ~$2,500 ($2,000 Mortgage + $250 PMI + $250 Property Tax)
The new market value, based on a current appraisal, is now $210K (30% market drop is not unusual)
The NEW program would be $180K mortgage @ 3% ($210K – $30K initial down payment) results in a monthly payment of ~$1,200 ($850 Mortgage + $100 PMI + $250 Property Tax)
Program Benefits:
Bank “Book” vs. “Market” values are equal
Homeowner disposable income improved by $1,300 / month!
Housing market is stabilized AND retains equity for homeowner
Creation of jobs (appraisal, mortgage brokers & home improvement activities)
Easing of credit
Increased spending in the marketplace, further increasing job market
Much higher Return-On-Investment for us tax payers & the country
There is not a person that I know, from all income levels, who would not benefit from this type of program and who would not be interested in participating… run the numbers… it works!
Please feel free to share with your colleagues… I will as well.
Worried Homeowner,
A few months ago, when the stock market tanked, I thought a similar plan may work but after whipping out an excel sheet and playing with some numbers, I quickly decided that it’s not feasible. The biggest thing a plan like this would do (outside of costing a couple trillion at best) is eliminate the refi. market for decades and destroy every financial institution that makes money off mortgages. The upfront costs would nearly bankrupt the government and the implementation and completion of the plan would be a nightmare – the end result would be a government run banking system that wouldn’t make enough money to operate (just my opinion). Then there’s hyper-inflation…
Would this be limited to homeowners or could buyer’s get a free loan at 3% too and if so, for how long?
You don’t think consumer’s should lose their down payment? I hate losing money just like the next guy, but I decided to take a risk and would be happy enough getting my principal drastically lowered and a killer 3% interest rate
Curious to hear what others think about the plan, I just see it doing more harm than good, if it could even be done.
bleh – sorry about the several misused (’s) !!
Interesting ideas, all of them. What is apparent is that there is no easy solution.
With the continued mass layoffs and job reductions, our biggest issue is consumer confidence. Retailers (see auto makers and shopping centers) are feeling the same level of anxiety the builders are feeling. If the consumer does not feel confident enough to buy a car, they certainly do not have enough confidence to buy a house.
A stimulus bill that puts money (tax reductions and credits) into a consumers hand and builds jobs is the first step. When consumers find a level of confidence that their pay check is secured, then a stimulus program for housing will work.
Then a housing stimulus bill will need to deal with the foreclosure problem and the confidence to buy. Lower rates and tax credits will help the buyers. Lower rates, longer terms, shared equity improvements and debt relief will help the foreclosure problem.
One step at a time is needed. Let’s pray the first stimulus bill (signed today by President Obama) will bring about job creation and consumer confidence.
Steve