Let's Fix AMERICA!
Monday, November 24, 2008 - by Dan Nussbaum
There is a very interesting article in the Wall St Journal today, Nov 24, 2008, under "Builders Make Plea for Federal Aid".
Here's my take on this article, as well as what I feel needs to be done for the benefit of all Americans.
Builders should NOT get tax credits, nor should buyers for buying new homes. Anyone building a new house now should be tarred and feathered. Are you kidding me? What's next--selling ice to the Eskimos?
Builders who overbuilt---and had their own mortgage divisions who qualified sub-prime borrowers helped get us into this mess by creating an oversupply of homes, and by putting some people into these homes who clearly could not afford them! Now we deal with the foreclosures on these properties, and the inventory glut that this created.
Let them wait. Their turn will come.
HOWEVER, buried inside the copy was this--
If the Fed provided mortgage subsidies to bring down the risk premiums so that the spread between the 10 yr bond and 30 yr mortgage rate was normal----this would be an amazingly easy solution and have the best effect.
They stated that if they bought/brought it down 2% for $200k mortgages---then the Federal costs would be $143 billion.
It is my contention that--
Historical spreads between 10 yr bond and 30 yr mortgage is typically 1.25%. With the 10 yr at 3.25--then mortgages should be 4.5%. It is now about 6%----so only a 1.5% buydown would be needed, so the estimated cost would be approximately $110 billion [NOT $1 TRILLION!]
The effect of 4.5% mortgages would cause properties to be worth 20% more overnight as prices are typically an inverse relationship to mortgage rates-, and this could/should create a buying stampede. Once prices started going up on their own----the risk premium would dissipate anyway as perception of housing to be an appreciating asset takes hold again!
How many people would feel better if their homes regained 20% value by this? The stores and malls would get a lot busier, people would buy cars etc.
SO, I URGE EVERYONE TO SUPPORT THIS!
It's cheap---way less than buying all the junk paper from people and banks who made these mistakes in the first place. Instantly---there would be way less people underwater---and everyone wins.
There is NO downside to this proposal.
While the article states this should be done for conforming mortgages---make it for ALL mortgages that conform this year, up to $729 k in high-priced areas---and allow that number to used next year without the expiration in place that is there currently which would lower the amount qualifying for the conforming mortgage status.
The inventory of homes for sale would dry up quickly as we really have 4 years of "pent-up" demand. AFTER the inventory is reduced--THEN it would make sense for builders to build new homes---and people would actually buy them! THEN the builders would recover.
Combine the above---with an announcement by new president Obama that he has decided NOT to raise the capital gains tax because of the weakness in the economy, and everything is fixed almost overnight as you could expect a huge stock market advance.
The solution is simple. We needs the reflation of housing prices and stocks in order for the economy to improve, and to save the jobs of millions of Americans.
WHY DO WE WAIT?
IS THIS NOT THE BEST, QUICKEST, AND CHEAPEST SOLUTION to repair the economics of America?
Please send this on to ANYONE who can influence these guys in Washington---and LET'S FIX AMERICA!