The term ‘bailout’ has become a staple in the American economy over the past few months. Everyone has heard about the $700 billion bailout of financial institutions and just as many heard about the bailing out of Fannie Mae and Freddie Mac from back in October. Some people have been for or against it, and with just reasons. On one hand, we’re using more government spending that could be used better elsewhere to save something that was by all means failing. On the other hand, banking and housing are driving factors of the economy and you can argue that the money couldn’t be better used elsewhere. Regardless of what your opinion is, $700 billion is a lot of money for our government to be spending. It’s a lot more money than a school levy ever needs, and some areas struggle to pass those, so it’s really hard to imagine what $700 billion is needed for.
A lot of people look at financial institutions and immediately think loans, more notably mortgages. Its no secret that when it comes to mortgages, there are institutions that end up giving more money out than they should be to some customers, and we find ourselves in the situation we’re in today with borrowing standards being more restrictive on all fronts. Because of these restrictions, people aren’t making the big investment in home owning or putting their stake in a new home, despite a great buyer’s market.
I bet you’re asking yourself “Dave, where are you really going with all of this?”
The Housing Stimulus Plan from the National Association of Realtors was recently approved to be submitted to Congress. The plan is centered on getting apprehensive buyers to get into the market, helping lead to an end of free falling home prices. As I mentioned in a previous blog, Real Living has held two City Wide House Hops and while I don’t know the success rates of the open houses translating to transactions, I do know from my open houses that the incentives Real Living incorporated with Real Living Mortgage didn’t translate into business for me. Few people really didn’t react to the incentives, which told me that it was not enough to meet their needs. Something on a national level needed to be done.
The plan has four focal points:
1. Take the $7,500 first time homebuyer tax credit and make it available to everyone and eliminate repayment provisions.
2. Keep the Fannie Mae and Freddie Mac loan limits at their 2008 levels.
3. Use money from the $700 billion bailout to lower mortgage interest rates to a max of 4.5% on a thirty-year mortgage on homes under $1 million for homebuyers.
4. Prevent banks from taking part in real estate brokerage and management.
There it is in a nutshell. This is what real estate is trying to do with the money from the bailout. There was an uneasy feeling from people when the $700 billion was granted by the government, and mainly because people didn’t exactly know what it was for other than a failing system. This however proves there is a plan in place to help revive a very important sector of our economy.
I like the plan to be perfectly honest. People are more adverse to spending money right now, so the $7,500 tax credit should be open to everyone. Everyone is going through the same economy and if real estate is going to nationally rebound, you can’t expect a tax credit and first time homebuyers to do all the heavy lifting. The biggest impact I see coming from this plan however is the interest rate buy-down plan. I have friends and clients tell me 6% interest rates are just too high, so you can see where this is my favorite part of the plan. Lets look at how big an impact this is going to be if it’s passed by Congress.
Take a $150,000 home with $10,000 down on a 30 year mortgage with 4.5% interest and $2000 in property taxes. The payment on that will be a little under $1000. Looking at today’s current rate of 5.75%, which is still low, your payment would be a little under $1100. You would be spending $1200 more a year over 30 years. I don’t think I need to multiply $1200 by 30 years for anyone to see what they would save over the entire length of the mortgage. Let’s just say instead of exact numbers you would easily save what could amount to two cars for your future kids to drive to school or up to two years of college education, depending on the school of their choice. Now imagine how much money you could save if the experts are right and supporters want the rates around 3%.
Hopefully this plan or one very similar to it gets passed through Congress. People need to not fear home owning or this economy if they have a steady job. With stricter lending standards, this plan looks like the kick in the butt fence sitters need. The only real flaw would be its lack of help for those who are in danger and already own a home, so that may be what holds the bill back from being passed.
I highly suggest reading the article about it over at RealtyTimes.com. http://realtytimes.com/rtpages/20081203_buydown.htm
It’s the basis for most of my information, but it’s definitely got me intrigued to look more into it. It’s quite exciting to think of the chain reaction of events that get more people in the market of buying.
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