Posted by Tim Burrell.  Many articles are appearing that analyze the Bush Administrations proposal to stimulate the economy.  Virtually all of the articles miss the most important point, which is the same point that the stimulus package misses.  It is claimed that the biggest problem in the economy is the sub-prime loan fall out, and its effect on limiting the availability of financing, which in turn effects the real estate market.  Without financing, would be buyers cannot buy the homes that are increasing the inventory of homes for sale,  particularly in areas other than the Triangle.  When the inventory is too large, the real estate market is out of balance and prices decline.  These other areas have an indirect effect on sales in the Triangle, as people trying to move here from depressed areas have a hard time selling their homes, so they cannot buy homes here.
 
Since the problem is a lack of financing, the solution is to provide more financing.  New regulations proposed by Congress restrict the type of financing that can be sold easily, basically eliminating sub-prime loans, so that most lenders and brokers favor loans associated with FHA and similar organizations.  The loan limit for these conforming loans is $417,000, which is too low to help the markets like California where foreclosures are high and the inventories have dramatically increased.  So, raise the loan limits for these loans at least to $625,000,  as suggested by the National Association of Realtors.  This will allow more loans to be available, which will allow more people to qualify for financing, and allow more homes to be sold.  It will cost the taxpayers nothing, instead of the $150 Billion proposed by the Bush Administration.
 
The House of Representatives has passed legislation that would allow this to happen.  The Bush Administration indicates it will only support this legislation if it includes a change in the way the FHA is run, and provide for more oversight.  The Senate is so opposed to this idea that the legislation needed to finish what the House of Representatives started has not even been introduced.  This ideological dispute over a theoretical problem is preventing a no cost solution from going forward.  So, people lose their homes to foreclosure, homeowners watch their equity erode, banks get into financial trouble as their inventory of Real Estate Owned (REO), as the administration and the Senate debate over this unimportant issue.  This reminds me of the debate in the 1960's over the shape of the table at the negotiations to end the Vietnam War.  While the politicians debated whether the table should be round or square (and they would not start negotiating until they agreed on the shape of the table), soldiers and civilians died in continued fighting.   Similarly, while the Bush Administration tries to force its agenda of FHA oversight on the Senate, the housing market in many areas of the United States suffers. 
 
It is hard to see how you can stimulate the real estate market using the indirect approach of giving consumers a tax rebate, which is a small amounts of money to millions of consumers, expecting they will spend it immediately.  Consumers will spend these little amounts on little things, for which WalMart and Best Buy will be thankful.  If there is a boom in Big Box stores, there may be more sales clerks hired, and maybe some of the new hires will make enough money to buy a house, but not in California or other high cost areas that are in the most need of assistance.
 
The best approach is to Keep It Simple.  If you want to help the real estate markets that are out of balance, do something that costs nothing which directly aids those markets by correcting the shortage of financing.  If you are a politician you might like the Administration's proposal as it may get you the vote of the consumer who just bought a big screen TV.  But it would be wiser to do a great deal more to solve the problem by providing more financing, and the most acceptable financing is FHA loans.  
 
We are fortunate in the Triangle that most of the homes can be purchased with a loan of $417,000 or less.  We are also fortunate that the real estate market in the Triangle is good, particularly for homes priced under $417,000.  But, it would be nice if the politicians stopped their petty squabbles to help the rest of the United States.