2008/11/Rescuing Real Estate Market

One of the questions people are always asking me is “When is the housing market going to bottom?” Or when is the real estate market going to turn around? These are obviously a difficult questions to answer and impossible to predict. I used to think the real estate market would start to see a turnaround in the fall of 2009, but given the current situation of the economy, I think it may be a few more years until the housing market starts to stabilize.

Housing is about supply and demand and currently the supply of homes greatly exceeds demand and I don’t for see it changing anytime soon. So what can be done to either increase demand for housing or decrease the supply of homes for sale?

Reasons why the supply of homes will not change anytime soon:
• Foreclosures and Short Sales continue to flood the market
• The amount of potential home buyers have been greatly reduced due to the large amount of foreclosures and short sales
• The unemployment rate continues to rise
• Stricter lending practices

The government recently started outlining a plan to deal with the amount of foreclosures and some banks have stopped foreclosing on homes and have instead began negotiating with homeowners who wish to remain in their homes. This is definitely a step in the right direction, as it should eventually slow down the amount of homes on the market. So then how do we increase the demand for homes?

Solving the demand for housing is a little more difficult since you can not force someone to purchase a home and I don’t think sellers will just give them away, so you need to give potential home buyers some incentive to purchase one. One place would be to redo the current $7500 first time homebuyer credit Congress recently approved as part of the housing stimulus package. As it’s currently set up, this credit is required to be paid back over the next 15 years, which is the equivalent of a 15-year interest only loan, which isn’t a bad idea and in a normal economy and real estate market would be a great idea, but this is not even close to normal. They should either treat this credit just as they would a grant or put some restrictions on it like, if a homebuyer purchases a home and lives there as their primary residence for at least the next 5 years, the $7500 need not be repaid.

Another way (and a bit more drastic) to increase demand for housing is by freezing mortgage rates for a specified period of time. I do not know exactly how mortgage rates are determined, but I do know they are primarily based on the 10-year note (bonds), which has recently had a range of 3.20-3.75%. So what if mortgage rates were frozen at 5% for the next 6 months? The banks could still make money on the spread as well as any additional fees that go along with getting a mortgage and could you imagine all of the refinance opportunities?

I understand the above idea is a bit drastic, but desperate times call for desperate measures. I would also like to mention that The National Association of Realtors (NAR) is currently fighting for the $7500 first time homebuyer credit to become a grant, and hopefully they are successful.

Scott Epstein