How the Stimulus Package Hurts Real Estate

We all know that the economic stimulus package exists because real estate crashed. Now, I am working on another article that will detail and explain how we got here, but that is a story for another time. The Economic Stimulus (Porkulus) Package contains several key provisions that directly affect real estate.

Now, the National Association of Realtors feels that anything that reduces the prices of houses is a bad deal. Their argument has some justification, because when the price of a house reduces to a value less than the obligations (liens, mortgages) standing against it, then we have a recipe for foreclosure. However, that is not their real motivation. Lower housing prices mean lower commissions, as most commissions are based on a percentage of selling price.


Personally, I think that we should be looking at housing affordability. In other words, what combination of factors will allow MORE people to actually be able to OWN homes? We need a combination of low interest rates, favorable mortgage terms, and low housing prices.

The problem in all of this relates to how housing prices are set by the marketplace. The rental market has an impact on this, because most people who are looking to buy a first home currently rent a house or apartment, and they will be trading a rent payment for a mortgage payment. They will also be divesting themselves of some level of their personal savings for a down payment and/or closing costs.

A person who is accustomed to renting will take a look at the family budget, and determine what amount can be allocated toward a mortgage. Most people overlook all of the extra costs that go into owning a home, including taxes and insurance, maintenance, water, trash collection, etc., but we’ll ignore those costs for the moment.

If a family determines that they can afford $1,200 for a mortgage payment, they will volunteer this fact to their mortgage broker and Realtor®. In turn, a determination will be made as to how much house that family can afford. If interest rates are at 5.75% (a currently available fixed rate), then this relates to a principal amount of about $207,000. Assuming that the family has the proper down payment of 20%, this means that the family can afford a house valued at about $260,000.

Now, the Realtor’s job is to find a house for which the family is willing to spend $1,200 per month. So, the family will look at the marketplace of houses, and determine from the range of homes available, which is worthy of their $1,200 per month budget. As a result, all houses in the market that justify a monthly expenditure of $1,200 will be worth about $260,000. This is a simplistic depiction of how retail housing prices are set.

What can complicate this scenario and formula is when the government (or the Fed) steps in to try and affect the housing market. Here are some items in the budget, which are supposed to help the housing market. Analyze each, and try to determine what effect each will have on the cost of housing. Then, determine the effect each measure has on the affordability of housing:

1. An income tax credit for first-time home buyers of $8,000 2. A reduction in the mortgage interest deduction for families earning over $250,000 per year 3. $100 down payment mortgages on FHA loans to buy HUD repos

1) An income tax credit for first-time home buyers will increase the price of houses by making more money available for the purchase. In other words, no one likes to leave money on the table, and the sellers will grab whatever is there. The downside to the credit is that it is only applicable to purchases that occur by first-time home buyers in 2009, which eliminates a large part of the buyer pool. In addition, the credit won’t be received until 2010, so it is not available for down payment money.

2) Lowering the mortgage interest deduction will actually reduce housing prices, because the net cost of ownership in high-cost areas will increase, when those capable of making the higher payments have a higher net cost of ownership, due to this tax increase (Note: A reduction in tax deduction has the same effect as an increase in tax).

3) $100 down payment mortgages increase the prices of homes by increasing demand. The offset here is that this program only applies to homes that have lost value and been subject to short sale/HUD sale auctions. The lack of a down payment does not reduce the price of the homes, but this will help to provide a bottom for housing prices in some markets.

This gives us three proposals, all of which will increase the net cost of buying houses, and decrease the affordability of those same homes. If the government did not get involved, housing prices would continue to fall, thereby making homes more affordable for everyone. Oh well, at least the government tried to help out.

Special: Bailout Update

Early edition this week. I just received information on where some of the early bailout money went, and how it is allocated. I seem to recall hearing that the monies were to be invested in such a way that taxpayers would be repaid as quickly as possible by those to whom help was given. I didn't believe it then, and given the new information that I have found, I certainly don't believe it now.

Here is a partial listing from the original $350 billion in allocations:

• $250 Billion for purchases of Senior Preferred Shares under the Capital Purchase Program (This is the money we are supposed to get back right away, when things turn around)
• $ 20 Billion to Bank of America - The government is to share in the losses on a $118 billion package of assets. (If we are sharing in the losses, how do we get this money back later?)
• $ 20 Billion to Citigroup, same as BofA above, where the government (you and me, folks) will share in losses on a $301 billion package of assets. (Again, same question as above.)
• $ 5 Billion to Citigroup to cover additional losses with TARP funds.
• $ 40 Billion to AIG Insurance. (This is certainly money well spent!)
• $ 21 Billion to prop-up the US Auto Industry. (Of course, the industry doesn't have to make any substantive changes, but GM is offering $20K buy-outs to ALL employees and a $15K new car voucher, if they will retire or quit early. Why not just offer $20K to every taxpayer to buy an American-made car?)
• $ 20 Billion to the Federal Reserve to improve consumer access to credit. (Really? Do we need this? Isn't loose credit what got us into this mess in the first place? Also, doesn't the Fed already control all of the money supply?)

This just explains where about $376 Billion of our dollars went. With over $1.5 Trillion to $2.0 Trillion in total bailout money, which will be added to our current $1.0 Trillion deficit; where, when, and how will we ever pay this money back?

The answer is, we won't! The Fed will have to print new money in order to make these payments on behalf of the government. They are trying now to sell $2 Trillion worth of Treasury Securities in order to fund these programs. Who still has money left, and who is going to lend to the US government now? Good luck with that!

This is just another example of your government screwing you big-time! While you can't fight back against the government, you can use the bailouts of financial companies to your benefit.


The National Consumer Rights Alliance (NCRA) offers the following services, all of which will help you to lower your outstanding debt, reduce your interest rates, improve your cash flow, and potentially save your home:

• Mortgage Modification / Forbearance / Short Sale / Recission - These are all tools offered by the association to help protect you from your mortgage lender. You may qualify for a reduction of principle in your mortgage, a reduced interest rate, postponement of late payments and penalties, conversion from an adjustable to a fixed rate, a short-refinance, or other concessions from your lender. The NCRA offers these services at much lower costs to its members than you will find anywhere else.
• Debt Settlement / Renegotiation / Bankruptcy - Debt Settlement can reduce your unsecured debts by 50% or more, and enable you to become debt free within three years, in most cases. Renegotiation can help you lower your interest rates. If you absolutely cannot pay your bills, or you have judgments or extended liabilities that have wreaked havoc on your finances, or if you just have no other way to save your home, the NCRA can refer you to a local bankruptcy attorney who will represent you at drastically reduced rates. We rarely recommend bankruptcy, but if it is your only way out, at least we can save you money.
• Credit Restoration / Secured Credit Lines / Bank Accounts - NCRA now offers NO-COST Credit Restoration services to its members. They used to charge a $5.00 fee per deletion, but they have now waived this charge, in order to further assist members in the current economy. NCRA can also provide referrals to secured credit accounts, which will help to reestablish credit, and if you have found yourself in the ChexSystems database, NCRA can refer you to a local financial institution that will let you open a checking account without a ChexSystems verification.

Since the Federal Government is giving so much money to financial institutions, they have been mandated to work closely with debtors to work out arrangements for debts. Since the government has agreed to cover the losses, it only makes sense for an intelligent consumer (that would be you, dear reader) to take advantage of this situation for your own gain. After all, it is OUR tax dollars that these companies are receiving. Take advantage of the help that is being afforded you. Until next post, I wish you well, and I hope that this information will help you. Spend wisely, and sleep well!

Here is a Special Offer from the NCRA for my readers, so listen up! 

For a limited time, just for readers of my blog, the NCRA will give you a family membership for the same price as an individual membership, for full payment upfront. This is a savings of up to $800 over the price of purchasing a family membership under their payment plan! 

Again, this is only for readers of this blog. In order to avail of this special, send an email to administrator@ncramembers.org, mention that you are a reader of this blog, and that you would like this special pricing. NCRA accepts PayPal, bank check, and credit card. Your benefits will begin immediately upon joining. This special pricing is not noted on the website, so be sure to request this special via email. This offer is good for the month of February 2009, and is subject to revocation without notice. In other words, this is a limited time offer. NCRA has promised this pricing for the first 100 readers who sign-up for the special. I suggest you send your email today!

Stimulus Package: WillI It Fix the Economy?

I am saddened by the fact that the people we choose to lead our country are trying to fix the economy when none of them has any clue about basic economic principles.

If you want to fix the economy, here is how you do it:

1) Let the banks fail. We already have the FDIC and Federal Reserve to bail them out and protect depositors.
2) Let non-competitive companies fail. The automakers have not been competitive for years, because the unions have ruined their cost structures with inflated salaries and unrealistic retirement and health benefits.
3) Give money to the consumers, and let them choose where to spend it. Let the people vote with their wallets for which companies and industries are offering the best combination of value and service.

The United States was established on sound economic principles and good morals. The productivity and ingenuity of the American people has long been our steadfast advantage. Unfortunately, our lame educational system and overzealous (greedy) unions have conspired to encourage stupidity and laziness.

The founding fathers would probably puke if they saw us today. We have gotten fat and lazy, and we have lost our ambition. People did not travel half-way around the world over 300 years ago, to an uncertain future, so that they could have a job at the local 7-11.

The Free Enterprise system is geared toward business ownership, not indentured servitude (jobs). The American Dream is not about home ownership, it is about business ownership.

Our people have been deceived, and it is about time that some REAL change is made. The country is destined to fail, and this fact is belied by the government trying to steer the economy by spending money it doesn't have.

Get ready for high interest rates, a very tough credit market, a continued housing crash, and rampant inflation. The government will have to start printing money in order to cover its debts. This will increase the prices of imports, drive inflation, cost jobs, and reduce purchasing power.

I hope everyone is happy with the CHANGE for which they thought they voted.

BTW, where is the change, when all I see is the same old people being appointed to important jobs? What changed, exactly? Democrats are still spending money, and Obama lied about the tax thing (we all knew he was lying, right?).

While you are waiting for the economy to correct, fix your credit!