Our government is putting money into the banks and institution directly now without commitment or direction, for the funds to flow, if flow at all.
Instead of putting money everywhere in creation and not knowing if it is going to be put to use, I think it should go into subsidizing new home purchases through Fannie and Freddie. If Uncle Sam just buys bad paper it isn't going to help real estate prices move lower and there are more bad mortgages to deal with. The banks they give the money to don't want to give mortgages because they are not sure that the real estate market prices are stable so they don't know how to judge risk. Let us say bankers do know and they are not lending at an acceptable rate in a declining market. Now follow this please. If they just have the quasi government agency's incentive their mortgages to the public, it will induce and lure people to buy real estate. Stopping the dropping prices, which in turn will stop mortgages from going under water at a fast pace, due to declining asset value. Paulson should use his capital to do the incentive. I will later demonstrate that it probably not cost the tax payers anything.
Banks will see the risk is lessened and then return to their roll of facilitating credit. I believe base on the fact the people would normally go back to the trough and feel motivated at a rate better then they could have had before or already have on their house now. If someone has a 5% loan on their house now, they are hard pressed to give it up and buy another house. So you must lower rates to about 4% for the first five years and 5% for the next 5 years and maybe 6% for the term. The federal government borrows 30 year paper, around 4% interest rate right now, so it would not cost the government anything!!!!
This subsidy would be offered for buyers who buy in the next 12 months, and congress may extend it if they deem necessary. However, it needs a short window so people move and take advantage of it. This would be cheaper then what we are doing now without any real hope of stopping real estate price declines. Many of the national home builders are recommending a tax credit for next year on new purchases. That could prime the pump also. It has been done before, in the 1970's. This will cost the taxpayers some money, but they will get it back in economic growth and no need to give away money in large scale programs, like we are now.
This, as we all know now, is a supply and demand problem. We need more demand. I look at it like this. Let us say you have an infection, just making you comfortable and giving you food and water will not make you better. That is what we are doing, just keeping the patient kind of stable a bit, but in time, without the antibiotics the patient gets worse and maybe will die. I say the infection will get worse and persist with declining prices, due to lack of demand and too much supply. The mortgage melt down started the problem; kind of like some one got you sick. Now the disease that ensued must be treated, not the original causes. Going out and beating up the person who got you sick does not make you better, or in this case, giving the culprit dinner and drinks and not attending to the sick person.
To sum up, if we support the real estate market through the government bridging the loans to buyers, we will stop the bleeding and build a way out of this mess. It is basic supply and demand!
Please, try to past this on to anyone who can use their head to peruse this to a real solution.
I hope I explained my position right, and that it is clear what I am trying to say. I think it is important. Do you agree with me, does this make sense?
Richard
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