My position (and every other real estate professional that I have spoken to on the subject of the Lieberman/Isakson Amendment and Amendment 353) is that it will definitely have a positive and swift impact on home sales and that these two stimulus package amendments will benefit the numerous businesses and workers that are related to buying homes.  

Due to the average price of homes in central Indiana, the amendment offered $15,000 tax credit will be an incredible value to a home buyer.  I have called to inform many of my potential buyers and sellers of the opportunity nearing approval in the Senate and their positive feedback has been tremendous!  For Hoosiers, this is a great way to increase home sales by providing an incentive to buyers, which as a result, will also help stabilize prices on properties.  A real estate engine with more buyers will help reduce foreclosures and short sales inventory and will also create a more competitive environment, thus, higher home prices.  Higher home prices may enable the seller to more easily pay off mortgage debt and will undoubtedly provide a fragile banking system with fewer defaults throughout the country. 

In reference to Amendment 353, which provides home buyers a 4.5% interest rate on purchases– It will help spur activity, however, I don’t believe that interest rates are killing demand.  That is, as long as we have rates as we do now in the mid-5% range.  As mortgage rates jump, there will likely be a pull back on home purchases, but not until rates ramp up a couple of percentage points.  If the consumer believes that the rates will retract, they may pause, but in the end they have the option of refinancing at a later date.  The referenced 4.5% mortgage rate, in my opinion, would be a nice selling point and a spark to activity especially in the luxury price range.  The low rate would also allow someone to look at a higher priced home and mortgage, compared to a smaller loan at today’s rates.  A byproduct of incredibly low rates by historical standards provided by government incentives is the fact that owners may not move as frequently.  We may see a short spike in home sales and push out slower sales a couple of years due to an artificially low interest rate.

I believe consumer confidence, jobs, & excess inventory are the main culprits affecting the housing industry. The latter is the most important for a builder since the consumer is able to save big dollars (value) through distressed sales and the amenities/features that are in those properties on the market.  I witnessed the sale of a home in Carmel, Indiana recently that would have sold for $1M (with repairs) a few years ago and was listed and sold in the mid 600K’s. There is no way for a builder to duplicate that home in that location for the price. No surprise, they had multiple offers and sold it fairly quickly.

A key to good lending practices is identifying the higher risk purchaser with a very low credit score (for ex. 500 FICO) that was approved for a loan just a few years ago.  There are some people that have no capability or track record to be able to successfully pay the mortgage month after month. These people will be higher risk and will lead to more foreclosures in the future. The rules should be tighter than they were, but I think that the current bank response is an overreaction.  Banking executives need to assess the risk standards and openly lend money to reasonable buyers with reasonable jobs and fair to good credit scores.  There is currently a small premium on conventional interest rates for buyers with less than perfect scores.  The increase in interest rates is driven by lower demand from major funds who purchased mortgage backed securities.  This lower demand is at least partially created by fear of risky investments that they were blind to see a few years ago.  Fannie Mae & Freddie Mac have lost leverage to sell the packaged mortgages to this market due to the recent amount of foreclosures.  The government backed FHA loans are increasing in usage and at current pace will likely overtake the share of all of home loans, however, the value of these loans is limited.  Here in Indiana, we should be pushing for higher FHA limits due to the discrepancy between conventional rates with less than perfect credit.  With higher limits, people would get money that is backed by the government (Higher than 271K loan amount) and as a result, a reasonable interest rate with a less than perfect credit score (below FICO 720).  FHA doesn’t penalize people like conventional rates right now for imperfect credit.  Conventional rates may be a full percent or more compared to FHA for someone less than 720 credit score.

Right now, mortgage interest rates are good for perfect credit and this is not currently the main challenge in the real estate market.  The interest rate could be a bigger issue if they increase towards the 7% mark, especially if this change is within a year.  The entire system could be improved if the limits were increased for FHA loans or conventional loan restrictions were eased slightly concerning credit scores.  I am not a proponent of the destructive lending techniques of a few years ago, just better judgment and more reasonable loans to buyers in the category  below “squeaky clean”.

This stimulus is a huge decision for buyers, sellers, builders, REALTORS, and all workers connected to businesses selling products for homes.  A tax credit and reasonable loan rates are keys to real estate activity.  In the end, if the goal is to spur sales, a bill with both amendments will dramatically increase sales in this Indiana real estate market. 

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