FEB 09 Fed Stimulus Plan

SPECIAL REPORT
The Stimulus Plan & Real Estate

What does the latest $787 billion stimulus package that will be signed into law by President Obama mean for the real estate market?

Where many of the details of the plan as it pertains to the real estate market are still being hashed out and will be unveiled on March 4th, here is what we know:

Obama has announced $75 billion of the stimulus plan will go directly towards stabilizing real estate markets. Congress has called for a temporary halt on foreclosures until this March 4th deadline, which most banks have announced they will comply with. It is expected they will try to come out with uniform rules for loan modifications, such as house payments can be no more than 31% of a borrower’s income. They will also try to make refinancing available to homeowners who are current on their payments, but have been shut out of the refinance market because of a lack of equity in their homes. However, they will only allow refinancing up to a 105% LTV limit. They are also planning on allowing bankruptcy judges to reduce principal balances in some instances. Personally, I believe this can have large negative unintended consequences in the form of higher interest rates, as investors are going to demand a material principal risk premium if a judge can basically override a legally binding loan contract.

As you all know, two areas of the real estate market need immediate help. The government hasn’t yet released specifics on the following, but has acknowledged the following areas need attention.

1) Mid to high priced homes: The latest NAR numbers show homes that sold for $400,000 and under are only down 3% from last year. Comparatively, home sales $750,000 and up are down 47% from last year’s figures. This is shocking, especially considering in areas like southern California, $750,000 is a relatively mid-priced home.

2) Investment properties: Since the government is trying to spark home new home sales, a vital component of these new buyers should be investors (not speculators!). However, with the current amount of added fees that are being imposed on investors, many have shied away. We need to entice them back into the market with more affordable financing.

The government will no longer require homebuyers to repay the $8000 1st time homebuyer tax credit for those that purchase from January 1- December 1, 2009. If the much lower sales prices from the 2005-06 peak, the tremendous tax benefits of homeownership (vs. renting), and the sub-5% current rates are not enough of an incentive, this $8000 gift should make any potential new homebuyer giddy with excitement.