Chalk one up for the Obama Administration. As of Friday, lawmakers were preparing to pass a $789 billion stimulus package to revive our struggling economy. President Obama was hoping for broad bipartisan support for the bill, a cornucopia of sundry government spending and business and personal tax breaks, but it just didn’t materialize. All Republicans, except Senators Susan Collins, Olympia Snow, and Arlen Specter, gave the bill thumbs down. We’ll withhold judgment, because we are unsure (as is everyone, really) how the stimulus plan will play out in the general economy.

That said, we are attracted to a few of the plan’s provisions, not the least of which is the provision to provide first-time home buyers with an $8,000 tax credit, which would not have to be repaid, unlike the current $7,500 tax credit. What’s more, it would extend the credit’s expiration date to December from July. Those eligible for the credit must purchase a home before Dec. 1, 2009.

The credit extension appears to have broader support than most of the provisions in the stimulus plan. Mark Zandi, an oft-quoted economist at Economy.com, responded positively, but somewhat tepidly, to the credit. “The home buyer tax credit is a plus for the housing market,” he said. Brian Bethune, an economist at IHS Global Insight, was more upbeat, noting on Bankrate’s Web site that the credit should “induce more home sales” and “buffer” the rate in the decline of home prices.

Whatever the level of enthusiasm, we like the credit. Home prices could use a buffer at this point. Existing home prices have tumbled to an average of $175,400 in December 2008 from an average high of $230,200 in July 2006, according to data from the National Association of Realtors. We’ve often said that lower prices are needed to stimulate sales, and it’s true, but potential buyers also need some assurance that prices won’t drop much further after they take the plunge. More buyers, which the credit encourages, decrease the odds of that occurring.

Who to Believe?

Actor, economist, opinion scrivener Ben Stein began an op-ed piece in the New York Times with this ominous declaration: “The banking system is in a state of peril not seen since the early 1930s.” Stein went on to say that banks “are in a state of fear that if they lend money again, those loans will go bad as well.”

But then Robert Samuelson, also an economist and opinion scrivener, noted in a subsequent op-ed piece in the Washington Post that perhaps banks aren’t in such a state of peril. “Contrary to popular wisdom, banks – institutions that take deposits – aren’t the main problem,” Samuelson said. “In December, total U.S. bank credit stood at $9.95 trillion, up 8% from a year earlier, reports the Federal Reserve. Business, consumer and real estate loans all increased.”

So who is right? It is difficult to say, because in the same op-ed Samuelson further muddied the waters by stating, “Unfortunately, banks remain reluctant to lend because they still have lots of bad loans on their books.”

Scratching your head? So are we. The point is that it’s tough getting a handle on this credit contraction, which is why we see so many conflicting solutions to so many conflicting problems. One thing is for sure though, the mortgage market is in better shape than most lending markets – funds are readily available at bargain rates. The good news is that it’s only a matter of time before our good fortune begins streaming into other sectors of the economy.

Information courtesy of:

Fred Levine
Accredited Mortgage Banker, AMB
757-287-0551