What will it take to get consumers off the sidelines to buy more houses and help stimulate the economy?
How about a mortgage at 2.99 percent fixed rate for 30 years for anyone who purchases a home before next July 1? Or how about a non-repayable federal tax credit of 10 percent of the home price up to $22,000?
Would enticements like these be sufficient to shift you into buying mode? Alternatively, if you preferred a plan that cost the Treasury less, would you go for a mortgage in the 4 percent to 5 percent range, fixed for 30 years, along with a $7,500 tax credit?
Though these may sound like wish-upon-a-star daydreams, some major housing groups are asking the incoming Obama administration to put hefty homebuying incentives like these at the center of any national economic stimulus plan.
The National Association of Home Builders wants Barack Obama and the new Congress to use a combination of deep mortgage interest rate "buy-downs" - rate reductions to 2.99 percent or 3.99 percent - plus federal income tax credits to jolt housing sales and new construction back to life. The National Association of Realtors, the largest housing lobby with 1.2 million members, also is asking the new administration for mortgage subsidies and tax credits, though not as deep or expensive as those proposed by the builders.
At the association's annual convention Nov. 7 in Orlando, Fla., the Realtors' chief economist, Lawrence Yun, said Congress should authorize a new housing stimulus that, in the coming year, would reduce new purchasers' 30-year fixed rates 1 percent or more below prevailing rates.
The Realtors also plan to lobby for a revised home purchase tax credit program - removing the current requirement that credits must be repaid - and to make permanent the $729,750 high-cost area limits on mortgage amounts available through Fannie Mae, Freddie Mac and the Federal Housing Administration. Those limits, authorized by Congress in February as part of the first 2008 stimulus program, will otherwise expire Dec. 31.
The housing industry's new emphasis on mortgage rate buy-downs harks back to the 1970s, when the government lowered rates to consumers through a program known as the "Tandem Plan," where the Government National Mortgage Association (Ginnie Mae) purchased discount-rate loans made by private mortgage lenders to homebuyers.
Buy-downs - essentially rate subsidizations - have long been a tool used by real estate sellers, buyers and brokers to enhance the affordability of purchase transactions. Here's how they work: If 30-year mortgage rates are about 6.5 percent, as they were in early November, a seller might offer to subsidize the interest rate of a purchaser by paying the lender money to cover the difference.
Though the cost to do so varies according to market conditions, a traditional rule of thumb for such buy-downs, according to John Paul Nicolaides, area manager for Wells Fargo Home Mortgage in Red Bank, N.J., is that for each one-quarter percentage point reduction in rate, the subsidizer - in this case the seller - would pay about one point (1 percent) of the mortgage amount to the lender.
A rate reduction of a full percentage point to the buyer, in other words, would cost the seller four points. On a $200,000 loan, that would come to $8,000 (4 times $2,000). On the same sized loan, a buy-down of 2 percent - from 6.5 percent to 4.5 percent - could cost $16,000.
In both the builders' and Realtors' proposals, the buy-down subsidy would be paid by the federal government. David Ledford, senior vice president for housing policy at the National Association of Home Builders, acknowledged that a mass-market buy-down plan would be expensive - an estimated $130 billion to $140 billion.
But Ledford argued that it would be a cost-effective way to energize the housing sector and stimulate the broader economy. "Our view," he said in an interview, "is that until you stabilize housing, we're not going to get out of the [economic and credit] mess we're in" - with rampant foreclosures and short sales, a glut of unsold new and resale houses, and a credit squeeze for many consumers.
What are the odds that the housing lobbies' proposals will make their way into the Obama administration's major economic stimulus package expected in January? Don't hold your breath for 2.99 percent 30-year mortgages. But smaller rate buy-downs - along with a revised tax credit - just might make it into the mix.