Posted by Tim Burrell - Many articles are appearing that analyze the Bush Administrations proposal to stimulate the economy. Virtually all of them miss the most important point for the Palos Verdes Peninsula. 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 like Palos Verdes and Manhattan Beach that require Jumbo Loans, i.e. loans above the conforming limit of $417,000. When the inventory is too large, the real estate market is out of balance and prices decline.
Since the problem is a lack of financing, the solution is to provide more financing. Doesn't that seem obvious. But, 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. Before the sub prime problems, loans were packaged together in large loans and sold to investors. Now, few investors will buy any sub prime loans, and Jumbo loans are hard to sell. The loan limit for conforming loans is $417,000, which is too low to help the markets like the real estate in Palos Verdes, Manhattan Beack and Redondo Beach. These are not the parts of California where foreclosures are the highest, but the inventories have increased.
The best way to solve the problem is to raise the loan limits for these loans at least to $625,000, as suggested by the National Association of Realtors. Our Governor also wrote a letter to Congress urging this increase. 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, that will have to be paid for somehow.
The House of Representatives has passed legislation that would allow this to happen. Before last week, the Bush Administration indicated it will only support this legislation if it included 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.
Last week, the Bush Administration and leaders from Congress indicated preliminary support for raising the loan limit, with some parties favoring an increase to a range of $600,000 to $625,000 and others wanting to go as high as $725,000. Either one would be much better than the current level. While this increase will not greatly help the single family homes of Peninsula Real Estate, where the vast majority of homes are priced over $1,000,000. But, it will help the townhouse and condominium market. Furthermore, it will allow imporvements in Torrance real estate, Lomita homes and San Pedro houses, so people from those areas can sell more easily, and possibly move up to Peninsula homes.
Without the increase in the conforming loan limit, It is hard to see how you can stimulate the real estate market in Torrance, Hollywood Riviera, Redondo Beach and Hermosa Beach using the indirect approach of giving consumers a tax rebate. This small amounts of money is given to millions of consumers hoping 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 the South Bay 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.
Lets hope that the new proposal to increase the conforming loan limit is quickly enacted.