The Wall or the Wave

The Wall or the Wave

Will the wall that the government is building to keep our country from drowning in the wave of foreclosures be too big? I set out this morning to write an article about the 4% plan that I’ve been hearing about. However, I was conflicted, as a realtor I saw huge potential for what this could do to help my clients to purchase homes, nevertheless, I also knew that in Orange County this might go too far and cause government subsidized increases in Orange County home prices, similar to the ones that got us into this mess in the first place, if not property regulated.

First, I’ve seen the inventory drop steadily in Irvine since the extra 90 day waiting period/ foreclosure moratorium passed, I’ve also been waiting for the wave of product that’s been left off of the market (read more about the moratorium). Of course, for those looking to buy in the past three months less inventory means higher prices. Even though the moratorium simply delayed the inevitable, if you want to buy a place today, more inventory coming in three months does not help you. Nevertheless, more inventory is coming and lawmakers are scared. With today’s realistic financing terms and the ARM and Alt-A loans adjusting there may be more price declines. Although price declines should mean more affordable housing which is exactly what we need, the government is against price declines because declines mean more to our economy than simply better affordability.

As crazy as it sounds, the government will do everything that they can to prevent more affordable housing as a result of more reasonable prices. Hence, we will surely see some huge measures in the stimulus bill to subsidize housing. The question is which will be bigger; the wall that the government is building or the wave of foreclosures that is bearing down on California. If the 4% mortgage idea passes and it is not heavily restricted I argue that the wall may be much bigger in Orange County and we may even see price increases for the two years this program is in place. Those that will benefit this most will be those that buy with today’s financing terms and prices and refinance using the new government subsidized loans. In fact, if 4% rates or subsidies similar may pass I will encourage my clients to buy as soon as possible and never sell. Especially as I see properties coming up at rental parity pricing using 5.5% and 6% loans, it’s tough to beat 4% thirty year fixed, even if we’re not at the bottom. However, with this type of subsidization in place it will be hard to imagine price declines. Moreover, as we know housing is a great hedge against the potential inflation that this “stimulus” plan has the potential to create down the road.

I am against government subsidization of housing that artificially increase prices. However, I am also against a complete economic collapse of our country. As a result, I’m going to play devils advocate and here is the argument. If properly regulated a 2 year period of 4% 30 year fixed interest rates will stabilize the housing market. Forget about inflation, the government doesn’t seem to care right now. If properly regulated this plan could be effective. In order to be effective the following provisions would need to be added.

1) debt to income must be below 50%
2) No stated income
3) Minimum 10% down for purchase
4) Loan amounts to be capped at 4x average income for the zip code the home is in -20% (for purchases)
5) Looking for other ideas that will keep this from sending prices artificially high

In conclusion, it’s tough to say which will be bigger, the wall or the wave.
What do you think?

To read more about the foreclosure moratorium and a great article about the 4% plan click on these links: foreclosure moratirium 4% loan proposal