Pick a bailout plan (and stick to it!)

By Dan Krell © 2008.

Everyone is talking about government bailouts these days, so how about bailing out the real estate industry? Ok, now that I have your attention, let’s consider a plan to stabilize the economy. Many agree that housing is a key indicator to our economy; so in an effort to stimulate the sluggish real estate market, Realtors among others are looking for solutions.

In an effort to stabilize and invigorate the real estate market, the National Association of Realtors (NAR) unveiled a four point plan in October. The plan is a proposal to Congress that includes eliminating the repayment requirement of the home buyer tax credit (an incentive created as part of the Housing and Economic Recovery Act of 2008), making higher mortgage loan limits permanent (also created as part of the Housing and Economic Recovery Act of 2008), prompting the US Treasury to compel banks to increase consumer lending, “improve the short sale process and expedite REO (homes owned by banks) sales,” and preventing banks from conducting real estate brokerage (NAR.org).

Additionally, rumors of a possible U.S. Treasury buy down of mortgage interest rates were floating around last week due to media reports linking the possible short term incentive plan to a November meeting with representatives of the National Association of Realtors (NAR). In response to these reports, NAR president Charles McMillan issued a statement saying, “We strongly encourage the Treasury to move quickly with its plan to lower interest rates to encourage current buyers to act rather than continue to wait” (Realtor.org). Although the NAR would like to have the subsidized interest rate buy down for home buyers, it is unclear how such a plan would be applied if passed by Congress.

Unfortunately, persuading people to purchase homes may only be the lesser problem of the current state of the real estate market; the greater problem may be perceived value. Even with current tax incentives and relatively low interest rates, many home buyers feel the economy is uncertain and continue to wait for the real estate market to bottom out.

Another angle on the problem was approached by Sheila Bair, Chairman if the Federal Deposit Insurance Corporation, who proposed to help home owners in danger of losing their home through foreclosure. This Fall, there were media reports of her idea to possibly use funds from the initial $700 billion rescue package to stem the tide of foreclosures, which could help stabilize the real estate market.

However, the dilemma in the present market place is not localized to the real estate market. Much like the U.S. auto industry, value not affordability is a main factor; providing incentives to purchase items perceived to have lower value does not always increase sales.

Why not a two pronged approach to the problem, provide incentives to home buyers and prevent foreclosures? There is no simple solution, as the problems are many, deep and wide spread.

Unfortunately, debate, dissention and criticism among policy makers continue to stall any clear path to recovery. Additionally, there is no guarantee that any implemented plan will be successful. Time will tell us if incentives spur home buyer activity and if delinquent home owners continue to be delinquent (even with renegotiated mortgages).

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 8, 2008. Copyright © 2008 Dan Krell.