Housing Market Needs More Help

The government's efforts to prop up the ailing housing market don't go far enough and as a result are unlikely to yield a full-fledged turnaround, say industry players and analysts.


Thus far, the emphasis -- and money -- has been on stemming foreclosures, which appeals to both Republicans and Democrats alike, partly because it is tied to another voter-sensitive issue—unemployment.

Still, critics say the government will need to do more to halt the decline in both home prices and sales.

“It’s a whole lot of noise,” says Melissa Cohn, founder of The Manhattan Mortgage Company, who says the Obama initiatives on foreclosures "do nothing whatsoever for people who are purchasing.”

In addition, the Obama administration initiatives have fallen well sort of expectations in some quarters, both for what they do and what they don’t do.

Industry representatives cite the inadequacy of the homebuyers' tax credit, a reduction in the mortgage interest tax deduction and the absence of any plan to lower and subsidize mortgage rates, something both administrations have dangled in front of the market for some time.

“Every little bit hurts,” says Jerry Howard, CEO of the National Association of Home Builders. “We're in such a precarious situation now.”

“We need more,” says Mary Trupo, public issues director for the National Association of Realtors. “If it has to come one step at a time, let's keep walking.”

Missed Opportunities

The first blow came in mid-February during the development of the stimulus package. The Senate version had a $15,000 tax credit for new homebuyers of any kind that could be used for either the 2008 or 2009 tax years. By the time the legislation became law, the provision was watered down to $8,000 and only first-time buyers.

“That reflects the Congress’ tilt toward social policy," says Howard, alluding to a growing criticism of the administration’s economic policies.  “We were disappointed in the lack of focus on housing in stimulus package.”

Howard says a similar measure during the 1970s recession applied to all classes of homeowners.

“We would have liked to see a larger amount and for all buyers, absolutely,” adds Trupo.

First-time buyers tend to be on the lower end of the income scale and are thus more likely to buy a less costly home, not to mention an existing, rather than a new one. Thus, the program doesn't help the whole  estate market.

Critics say the same of the new foreclosure policy, which in addition to helping mortgage holders avoid foreclosure, allows them to reduce their monthly payments via a refinancing measure.

“It will just help the low end, “ says economist Robert Brusca, chief economist at Fact & Opinion Economic. “Everything Obama is doing seems to be income oriented.”

That thinking appears to have also influenced the President’s budget proposal on mortgage interest rate deduction.

The proposal would limit the amount of mortgage interest allowed as a tax deduction, but it only applies to homeowners in the highest marginal tax bracket.

The $357,700 a year and over group now gets get back 35 cents on their taxes for every dollar of mortgage interest. Under the Obama plan, that falls to 28 cents on the dollar.

The mortgage interest deduction is “sort of a scared cow of home ownership and real estate,” says Trupo. “Making changes could have repercussions throughout the market.”

Trupo, Howard and others say the change in interest deduction could make larger mortgages less affordable and thus push down home values.

The mortgage interest deduction could become “a negative thing,” says Howard, given the fragile psyche of consumers.

Thus far, the biggest negative is the absence of a government plan to subsidize interest rates, which has been under debate for some time.

Trupo and Cohn say people were actually holding off on doing deals in anticipation of the measure.

David Zalubowski

“We're disappointed that it is not there,” says Howard. "You got to stimulate demand.”

Most in the market say a rate of 4.00 percent to 4.50 percent would make an extraordinary difference in sales,

The NAR estimates that the difference between rates at 4.50 percent and 6.00 percent, where rates hovered for much of 2008, is about 750,000 additional home purchases a year. On a $200,000 house, bought with a 10-percent down payment, the difference in monthly payments is $912 vs. $1079. 

Supporters argue that—along with successful mortgage foreclosure prevention measures -- would go a long way to dealing with the inventory problem.

“We need to push rates lower,” says Cohn, the New York mortgage broker, who says she’s seeing some "signs of life" in the market, mostly “people coming in looking for bargains.”

Interest rates are a problem in more ways than this. Lenders remain very cautious. Those that are making loans continue to charge a significant premium for jumbo loans, those that exceed the government’s recently increased so-called conforming rate of $730,000.

What’s more, interest rates have gone back up again. A 30-year fixed rate mortgage was briefly available at 4.75 percent. It is now at 5.25 percent, which may be low by historical standards, but apparently is still not low enough in this troubled economy.

The creep up in rates has hurt refinancing, which had been enjoying a welcome bump.

As with most aspects of the government’s extraordinary intervention in the marketplace and economy, there are unpleasant unintended consequences.

One reason mortgage rates have gone back up is that they are closely tied to the Treasury’s ten-year note, which was recently yielding 3.00 percent, having been as low as almost 2 percent.

“It’s all the federal debt being issued,” says Cohn.

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