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February 11th, 2009 10:06 AM by David W. Welch
I just pulled up the www.talk.realtor.com page and see the opening post is a criticism of the $15,000 tax credit. I did not read the whole post, but the opening statement assuming that purchasing a $175,000 home that is going to lose 7% of its value reduces the effect of the $15,000 credit. Why not say if it dropped 10% then the buyer would actually have lost $2,500. The real estate market is like any other market - it is a function of supply and demand. The tax credit is, and the Fed’s efforts to reduce interest rates are designed to stimulate demand. Real estate prices have fallen because there is an over supply and decrease in demand. Demand is a function of ability to purchase and desire to purchase. The $15,000 tax credit and lower interest rates address both the potential buyers ability to purchase (cash in hand) and desire (free money if I buy now instead of waiting until next year).
The supply side of the equation has had a lot less attention in the government’s plan. As I understand it only $50 to $100 billion of the $2 trillion being thrown at addressing the economy is designated for helping home owners avoid foreclosure. I think the administration could have a much more profound impact on both the housing situation and the economy overall by purchasing the actual real assets (homes) not mortgage backed securities or toxic mortgages etc. While this will somewhat negatively effect buyers ability to purchase it will improve sellers ability to sell their home for a price that is not so negatively effected by bank owned properties. I cannot speak for every market, but here in Orlando buyers are already seeing affordability indices that are off the chart. The last reported was December’s 145. That means the median wage earner is making 45% more than they need to afford the median priced home. Buying up the REO’s will reduce the supply of homes available, and I believe that will actually stimulate the desire to buy.
I personally am not big on too much government intervention, but I just don’t see how it could be avoided at this point. Having said that, I recommend four things the government can do to help get things back on track. First, improve the access and affordability of credit - this addresses the affordability side of demand. Next make the $15,000 tax credit applicable to down payment for all buyers - this addresses both the affordability and desire aspects of demand. Third, put some serious effort into keeping people out of foreclosure and in their homes, and buy up REO’s - this will absorb some of the oversupply of homes. Finally, the President and his team (Geinther) need to be on the same page with their message. President Obama cannot go on national television one night and say that this is the right thing and the right size to get the job done, then have his treasury secretary making statements that he is not sure the banking side of the equation is enough. A consistent and positive message coming from our leaders would have a huge impact on the desire side of the equation.
David Welch, Orlando Real Estate