Economic news this week has been uniformly pointed to economic slow down, so much so that the President and others are using the "stimulus" word.  Personally I think the only stimulus the government should introduce into and economy is a cut in tax rates.  As has been seen the last seven years when the current tax rates were introduced, tax revenues skyrocket for the government and spending throughout the economy is healthy and robust.  A rebate, as is being discussed, of a few hundred bucks to all the citizenry will have almost no impact on the economy.  As is seen annually when tax refunds come back in April, most Americans spend this money in one of two ways: savings/investment, or paying down/off credit bills.  Neither of these stimulates the economy.  Tax rate cuts on the other hand put extra money into every taxpayers pocket every month so they can make decisions to make purchases and that stimulates and economy.

 

As is usually the case, bad news for the economy is good news for interest rates and this week's news has given us a good dip in conforming rates and some downward pressure on Jumbos but otherwise flat.  And that is the primary cause for the drop in the median price of homes in California.  Remember the median price is the point at which just as many homes sell below that point as sell above that point.  With a drop in the median price we know that more homes sold at lower price points than higher price points.  Given the disparity between Jumbo and conforming rates, the increase of 1% in Jumbo rates in the past year and the current real estate market environment upper end housing is not selling nearly as much as entry level.  We see it in our company with a relative influx of first time buyers looking to purchase entry level condos and homes in the conforming price ranges--hence a drop in the median price.  If/when Jumbo money becomes relatively cheaper, or more in line with conforming rates we should see a boost in upper end sales as well.

 

That said my idea for a stimulus package would be:  1) lower tax rates 1-2% across the board  2) increase the conforming and FHA loan limits to 125% of the median price levels to envelope more of the lower end of the jumbo market to stimulate home buying and refinancing in those price ranges 3) have the government sit back somewhat and let the markets correct themselves which always occurs--albeit with some pain, but correct they do.

 

 

Please feel free to forward this email to your co-workers and clients--or send them to my Mortgage Blog where it is posted weekly.

 

Dennis

Friday, January 18, 2008

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