Economy: Supply and Demand Solutions Needed

Lower interest rates will get more buyers into the market. That's a solution within reach of the federal government.
By: Lawrence Yun: REALTOR®Magazine
In mid-November, NAR President Charles McMillan met with senior officials at the U.S. Treasury to discuss an NAR proposal that the federal government establish an interest-rate buydown program to lower mortgage costs and encourage home sales.

Both parties agreed that since even a 1 percent drop in mortgage rates can increase home sales, a temporary buydown in interest rates could lead to a significant turnaround in homeownership demand. Increasing demand is a necessary first step to soak up excess inventory, stabilize prices, and turn the corner on foreclosures.

NAR doesn’t take a position on how low interest rates should go, but for every 1 percent buydown in interest rates, we would see a half-million additional home sales over a one-year period, according to an internal projection. Increasing sales by this amount would shrink the number of homes for sale to a 7.5 month supply, down significantly from the 10 month supply toward the end of 2008. Historically, economists consider a supply of between 5.5 months and 7 months to be a balanced market.

Lowering interest rates isn’t the only action the federal government can take. A late 2008 decision by the Federal Reserve to buy mortgage-backed securities on the secondary market should provide a significant boost to lending.

Stimulating demand through an interest-rate buydown isn’t the only path to a housing market recovery. Reducing supply—especially those homes coming onto the market because of foreclosures—is another approach.

Sheila Bair, chair of the Federal Deposit Insurance Corp., has rightly received high marks from Congress and in the media for her call to use a portion of the Wall Street rescue funds to help financially troubled borrowers work out their mortgages. It is critical that Congress to do everything in its power to help these struggling home owners and prevent more foreclosed homes, an outcome that will only soften prices further.

It’s true that a program of large-scale loan modifications does raise the issue of moral hazard. All the help goes to troubled borrowers, while home owners working hard to stay current on their mortgages get nothing. That may not seem fair. But given the boost a rebounding housing sector could bring to the U.S. economy, every possible solution must be tried.

The interest-rate buydown deserves special attention, however, because it promises to have the largest immediate impact on increasing sales and stabilizing prices. To clear the way for this critical program, NAR has been talking with members of Congress to clarify what needs to be done to make things happen quickly.

While the details are still under discussion, what’s clear from President McMillan’s initial meeting is that the Treasury agrees with NAR that we need to spark housing demand. Now, we need action to go with good intentions.