Economist's Commentary: October 21, 2008

Quick Take on the Economy: October 21, 2008

By Lawrence Yun, NAR Chief Economist

The Fed Chairman supported a need for another economic stimulus package, which may pass in the lame-duck session after the election. Ben Bernanke specifically supported measures to help homebuyers return to the market including tax credit for homebuyers and the government directly paying for the Fannie/Freddie loan guarantee fees.
Since there is already a homebuyer tax credit, but with a repayment feature, a new tax credit could be introduced to simply eliminate the repayment feature - as NAR has been advocating. Though there is a present net value benefit of tax credit for homebuyers even with a repayment feature, the removal of the repayment requirement makes it much easier for consumers to understand the genuine tax break of buying a home.
Picking up the cost of Fannie/Freddie fees will permit lower mortgage rates for consumers. As these fees rose in early summer, consumers had to pay - not directly - but via higher mortgage rates. One reason for the higher than normal credit spread between mortgage rates and Treasury rates was because these fees were imbedded in the loan package. If the fees are picked up by the government, and not consumers, then the spread will narrow.

Following the takeover of Fannie and Freddie by the Treasury Department in September, new CEOs were appointed to oversee the organizations.
Both CEOs commented that the role of their organization is not to maximize shareholder return but to maximize liquidity with sound underwriting standards. This makes perfect sense since they are under conservatorship, rather than facing bankruptcy.
Some fees that were imposed or planned by Fannie and Freddie - prior to the takeover - will get removed. That is good news for homebuyers as mortgage rates can come down.

The stabilization of the housing market is an absolute priority. Only by getting buyers back into the marketplace will there be home price stabilization. Only then can the values of mortgage-backed-securities be known and get traded in Wall Street. That in turn will help thaw out the frozen credit market.
Homebuyers are getting tremendous incentives. A strengthening in home prices is just around the corner.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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