Housing Stimulus Letter – A Suggestion

Last night I was on the couching “vegging” in front of C-SPAN watching economic witnesses testify over the likelihood that the proposed economic stimulus bill will actually have a positive effect on the current economy.   Sounds like fun evening huh?   Nevertheless, I woke up this morning as an idea flashed through my mind.   Rather than let it simply fade, I thought it best to share it with someone so I decided to fire off a few emails to our  US Senators from North Carolina, Richard Burr & Kaye Hagan, along with my representative in the House, Sue Myrick.   I am writing this post to share the email that I wrote and to solicit comments & criticisms from you about whether or not it is a good idea.   Please share your thoughts!

Here is the body of the message I sent:

“As a productive Realtor in North Carolina, I would like to offer some suggestions about improving the current housing situation through government stimulus.   At present, the challenge with my market in Charlotte, NC appears to be a significant slow down in the total number of home sales.   In December 2008, the number of home sales in Mecklenburg County was down 42% from the same period a year prior, which was down 31% from the year before that.   Clearly demand has decreased.   During this same period, more and more homes have come on the market and supply has increased.   I suspect that in most other areas around the nation, the numbers and severity may differ, but the situation is the same.

Basic economic principles of supply and demand tell us that as demand decreases prices will drop.   The same principles say that as supply increases, prices drop.   Put those two forces together and that only magnifies the rate at which prices are declining.   This is the state of our current housing market.

The only way to stabilize home prices is either increase demand, decrease supply or both.   The first sign that this is taking place is for the total number of home sales to begin increasing.   There is no way that prices will stabilize or begin increasing again, until the total number of sales begins to rise.

The latest reduction in interest rates has definitely increased demand by making housing more affordable.   However, many potential buyers that are willing to make a home purchase cannot because they have a home to sell.   In many cases, these homeowners owe more on their homes than they can get out of a sale.   This problem exists not only in the very hard hit areas where prices have dropped 30-50%, but even in our relatively stable market of Charlotte, NC.   The problem is not likely to go away by itself and certainly not until home prices catch back up.   Putting these homeowners in a position to sell their homes and purchase new ones will be a significant step toward increasing total home sales.

Those mortgagors affected by the dramatic drop in home prices come in many shapes and sizes:

1) Investors who speculated on property using risky mortgages and should be responsible for paying the price.   2) Homeowners who bit off way more than they could chew and coupled that decision with high loan to value mortgages.  

3) Homeowners who used good judgment by purchasing with a traditional mortgage and 20% down payment, but who are still upside down because values have fallen well below their initial investment.

It is morally questionable whether or not the citizens of our nation should be responsible for bailing out the few that acted irresponsibly.   However, there are also those who acted responsibly in the context of the times and have become victims of extremely bad timing.   It is for the latter that I have some compassion.

Regardless of the circumstances, I do not believe that public taxpayer dollars should go toward relieving individuals of their financial obligations.   However, I also recognize that this is a time of great crisis and that assistance to these individuals could have a larger overall impact on the national economy.

A Federal bailout of funds simply given to any individual or corporation with accountability to the receiving entity in the form of payback is simply irresponsible use of taxpayer dollars.   For the record, I support no bailouts and believe that the economy should be left to recover on its own through the free market system.   However, if our elected officials feel that stimulus must be injected, I offer the following suggestion.

What if our legislators created a trust fund using stimulus dollars for individual home owners to borrow from in order to make up for a deficit between what is owed to their lender and the proceeds of their sale?   This Federal loan to the homeowner could be payable back to the Federal government through their individual tax returns over a predetermined number of years.   The loan would allow the homeowner to sell their home at today™s fair market value and the individual would then only be responsible for repaying the deficit portion.

In many cases, these loans could be substantial.   However, it creates accountability to the individual and becomes not just a bailout that encourages irresponsibility.   Homeowners that will take a loan from the Federal government as assistance in selling their home will not be completely let off the hook from the financial obligations they made during boom times.   However, it will provide an option for those wishing to do the responsible thing.

There will be many homeowners who choose not to take advantage of this option.   Rather, they may choose foreclosure instead but also lose their credit rating and end their chances of owning a home again for many years to come.   Either way, homeowners will have to choose and become accountable to the consequences of their choice.   It is fair to the homeowners and it is fair to the taxpayer.

Clearly, there are details that need to be developed and loopholes to be closed.   But I believe that this option is a much better alternative to simply handing out federal monies with no accountability to the receiving party to suffer the consequences of their decisions that are now affecting the rest of us.”        

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