Will a $700 Billion Bailout Do the Trick?
Posted by Allison Simson on Wednesday, October 8, 2008 at 12:00 AM
By Allison Simson / October 8, 2008
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Will a $700 Billion Bailout Do the Trick?
I recently received this as an email from a friend and fellow “Howard Brinton Star Power Star” He’s a person I respect and this article makes as much sense to me as anything else I’ve read or heard lately (although I do acknowledge my Real Estate bias!) If nothing else, it made me think in a different way about our current situation. I hope you enjoy this, and if you have any comments or further questions, let me know. I am a firm believer that the steps the gov’t is taking will help and even though it is a bit of a bitter pill to swallow, this will avert a meltdown of the economy, and once that “good news” hits the streets and starts to take effect, some of the fear we are all experiencing will dissipate.
By Jeff Scislow
Our nation is at an interesting juncture. You’ve heard it over and over in the past few weeks: Our economy and banking system is under incredible pressure; one of a serious nature.
The mortgages which were written between 2004 and 2006 paved the way for the collapse in real estate prices, which in turn has been pulling down all other areas of the U.S. economy. Currently there are over 1 million foreclosures across America. The frightening fact is that there are more than 6 million mortgages that are 30 days or more in arrears! This is potentially more serious than anything we've seen yet.
The U.S. Government's $700 billion dollar "bail out" plan is designed to alleviate the pressure on the banking system which is being hurt by bad mortgage debt.
Due to the fact that our government has been way too slow to act, this plan is essential, but it is not the solution in my opinion.
I currently have a proposal that has been submitted to the U.S. Treasury Department in Washington D.C. (Henry Paulson's office). In my opinion, the primary component to the potentially catastrophic problem is the fact that "housing prices" have fallen dramatically and could continue to fall across America. Unless the prices of houses firm up and stop falling, we will continue to see more foreclosures; the result of which, is our entire economy could be swept away right along with the values of our nation's real estate.
So what is the solution?
The inventory levels of houses "for sale" are so incredibly high. The inventory levels MUST be lowered. The best way to do this is to provide extremely low interest rates (for a limited period of time) to entice people to buy houses now, in the midst of the crisis. I propose that instead of "bailing out" the banks as a primary "fix", that the government subsidize the "purchase of real estate" by way of buying down the interest rates to unprecedented levels (i.e. 3.5 to 4.0 percent for 30 yr fixed rates).
When one compares the "cost" to the government (and ultimately the tax payers) for the currently proposed "bail out plan" against the cost of a plan that enables citizens to buy real estate at incredibly low interest rates, the cost is higher with the currently proposed "bail out program" in my estimation. In addition, the currently proposed program does not fix the problem, but only provides a temporary band aid.
Look at the numbers: A foreclosure costs a bank $70,000 on average. With all the foreclosures taking place in the U.S. the costs are incredibly high! The bailout plan proposed will provide relief to the banks that have lost all this money in foreclosures. Although the proposed "bail out plan" is essential NOW due to the fact that the government did not act quickly enough, it is not the ultimate fix.
My proposal involves the buying down of interest rates to enable U.S. citizens the incentive to buy real estate NOW! By buying real estate now (with very low interest rates), several things will happen: 1) inventory levels will drop; 2) as inventory levels drop, price will stop falling; 3) as prices stop falling less people will foreclose on their homes because they see that market values have firmed up and stopped declining; and 4) consumer confidence will begin to return to the marketplace and economy.
The cost to the government to subsidize the purchase of an average priced house in the U.S. would run approximately $25,000 (per house). This is much less than the cost of bailing out a bank to the tune of $70,000 per house! The bailing out of banks that are drowning in foreclosures is only a temporary fix, while the injection of cash into a program that entices our citizens to purchase the existing inventory of houses is the kind of program we need to turn the markets around and avoid disaster!
Let's go to Las Vegas for a moment. Picture the Hoover Dam. Imagine that the incredible wall of the dam had several leaks. Water was spewing out through the wall in several locations. The current government plan is designed to "patch" the leaks. Is it necessary? YES, absolutely! But it is only a temporary fix! The pressure is mounting up and is too great on the other side of the wall of the dam! The wall is the U.S. economy. The water rising against the wall is the tsunami of foreclosures and increasing housing inventory.
So what is the solution? The pressure must be relieved on the "other side of the wall" or it will soon collapse because it has been weakened.
To relieve the pressure, distributaries need to be carved out that disperses the water that is now building against the wall of the dam. Once the pressure is relieved from the wall, then repairs can effectively be made to the wall. The pressure can only be relieved by lowering the inventory levels of housing and the foreclosures that continue to mount. It is a fact, the level of foreclosures can be greatly reduced by lowering the current supply of homes available for sale; and the current supply of homes can be greatly reduced by providing U.S. citizens substantially lower interest rates in order to step up and buy one of these properties today.
A property financed at 3.5 to 4.0 percent will provide a very affordable house payment for any buyer and/or a wonderful cash flow for any real estate investor. Houses purchased with rates as low as these will stay off the market for many years; they will not be "flipped" - this is further good news for the housing market well into the future. Such program is not a bailout, but a partnership between government and the private sector. It is politically correct in an election year!
Now is the time for the U.S. Government to take action; because tomorrow could be too late!
Jeff Scislow
For answers to your real estate questions, call Allison at 970-468-6800. Email - [email protected]. Allison is a long time local in Summit County. Summit Real Estate – The Simson/Nenninger Team is located at the Dillon Ridge Marketplace. Allison’s long-time residency and years of real estate experience can help you make the most of any buying or selling situation. She’s a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours. Want to know the value of your Summit County property? Visit www.SummitHomeValue.com
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