Economist Proposal - Encourage homebuying

Wow, I found an economist with a brain! One that suggests what we need most are more buyers encouraged to buy, not buying bonds, not bailing out the banks, but buyers to buy real estate.

A plan to rebuild the housing market

By Allan Meltzer(go to link for entire article)

The US Congress and the Bush administration are considering ways to prevent mortgage defaults. Attractive for humanitarian reasons, it is a second or third best option to reduce or eliminate the housing problem.

The main problem in Britain and the US is an excess supply of unsold houses. As long as the large unsold supply remains, housing prices will continue to fall. The high risk in bundles of mortgages will remain until the market believes it knows how far housing prices will fall. The reason is clear. Falling housing prices increase mortgage defaults. Anyone buying a bundle of mortgages must anticipate that part of the bundle is now worthless and, as prices fall, more will become worthless. Currently, the forward market estimates that US housing prices will fall 11 per cent in 2009, in all a decline of 33 per cent from the peak in 2005.

Contrary to common belief and repeated misstatement, the mortgage market functions. Bundles are bought and sold daily. The price is around 40 to 50 cents on the dollar. This price allows the buyers to discount the loss they will take if prices continue to fall. Prudent buyers are unlikely to fail to take the discount.

The seller’s problem is that selling most of his mortgage inventory will wipe out his equity. Purchases by the Treasury will not help. Unless the Treasury decides to “stick it” to the taxpayers by paying much more than the market price, the seller is no better off than if he sold in the market. That is one flaw in the Paulson plan.

It is not the only flaw. Treasury Secretary Hank Paulson’s plan helps banks and lenders. It does not address the problem – an excess supply of housing. Eliminating excess supply will end the housing problem and help the mortgage market because mortgage value depends on house value. Buying or adjusting mortgages will not do much for house prices. And any programme to rewrite mortgages in default encourages more defaults.

To address the housing problem, Congress and the administration should take actions that increase the current demand for housing. For a limited time, say up to the end of 2009, allow buyers to use the value of their down-payment (or some part of it) as a tax deduction. Or, reduce the tax rate for qualified buyers who purchase a house between now and January 2010. Or do both. Give the benefit to all home buyers, including those buying a second or third house.

Keep reading at the full article We need more buyers