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The financial market struggles as home prices fall and foreclosures increase. Home builders call the Congress’ attention to stimulate demand for homes, without pulling up home values. However, economists are afraid that federal intervention may just encourage overbuilding.
Homebuilders want a $250 billion-worth stimulus package known as “Fix Housing First”, which argues that financial markets will not recover until falling home prices are stopped. They are appealing for mortgage rate subsidies and greater tax credits.
Critics say that this offer is expensive and promotes more of home purchases than loan modifications. The proposal offers a tax credit of 10% of the property’s value, making it $22,000, about three times of the $7,000 credit that has been earlier approved by Congress. However, builders say this has never been enough.
Builders call for interest rate subsidies, to bring rates down from 6.2% to 3% for loans in the first half of next year and 4% on the second half. Realtors push for a 4.5% interest rate for its estimate show that a 1% decline in interest rates makes about 500,000 to 800,000 home sales. However, this proposal will cost the Treasury about $143 billion.
Some economists see the need to stop building since a home price floor would just keep the supply and demand for housing out of sync. Interest rate subsidies may work but sometimes, no matter what kind of credits offered, if buyers do not have a job or enough income then they might not take the offer.
With the declining prices of foreclosures and tightening mortgage credit, home prices just continue falling. Coming up with an incentive to buy, instead of refinancing mechanisms could make buyers purchase a new house on better terms and give up their existing one.
Larger tax credit could attract buyers but it does not necessarily save the economy from falling home prices, increasing foreclosures, and the mismatch in the supply and demand for housing.
