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Struggling U.S. auto makers left Washington empty-handed after weeks of pleading for a handout, but that hasn't deterred home builders from stepping up to lobby Congress for help.
But any federal assistance would require policy makers to figure out how to stimulate demand for housing -- the problem at the root of the global financial meltdown -- without artificially propping up home values.
[Builders Make Plea for Aid] Zuma
Some economists fear federal intervention to help homeowners may instead encourage more overbuilding. Above, unfinished homes in Carlsbad, Calif.
The builders' lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won't recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner's mortgage rate.
Congress resisted a similar effort to pass a larger tax credit earlier this year, instead creating a $7,500 credit for new-home purchases that had to be paid back over 15 years, effectively extending an interest-free loan.
Builders are promoting the campaign with full-page newspaper advertisements, but face an uphill battle, with critics suggesting the proposal is too expensive and that it too heavily promotes home purchases rather than addressing loan modifications for delinquent homeowners.
The effort aims to stop the adverse feedback loop gripping the market. The cycle begins when falling home prices prompt some borrowers to default, leading to foreclosures. That further depresses home prices, hitting the banks that hold mortgage-backed securities, causing them to pull back and freeze credit. That in turn causes the economy to slow.
"The basic asset that is underlying all the financial problems that we're experiencing is highly unstable, and it's causing an ongoing hemorrhaging in the financial system," said David Ledford, who oversees housing finance and policy for the National Association of Homebuilders. "It's starting to snowball."
The homebuilders' proposal would offer home buyers a tax credit equal to 10% of the home's value, capping it at $22,000, nearly three times the $7,500 credit Congress offered to new buyers earlier this year. Builders say the earlier credit didn't work because it wasn't big enough and had to be repaid.
[Builders Make Plea for Federal Aid]
Builders also want subsidies for interest rates on 30-year fixed-rate mortgages for government-backed "conforming" loans, which currently are around 6.2%, to bring rates down to 3% for loans made in the first half of 2009 and 4% for those in the second half of the year. Realtors are pushing a 4.5% interest-rate buy-down for new loans. Lawrence Yun, the chief economist for the National Association of Realtors, estimates that each 1% decline in interest rates could generate between 500,000 and 800,000 home sales.
A rate reduction of about 1% on a 30-year mortgage typically costs the lender -- in this case the government -- around 4% of the principal. So a 2% buy-down on a $200,000 mortgage would cost $16,000. The NAHB estimates the subsidy portion of its proposal would cost the Treasury $143 billion.
But to some economists, "Fix Housing First" strikes an all-too-familiar refrain of "build more homes." Housing economist Thomas Lawler implores builders to "stop building." He and others argue that effectively setting a floor for home prices will prolong the pain because it will keep supply and demand out of sync.
"The government does not have the tools to rewrite the laws of supply and demand," said Harvard University economist Edward Glaeser. "By artificially increasing prices, we are encouraging more building."
Homebuilders frequently point to a similarly structured tax credit and interest-rate subsidy that Congress approved in 1975. The program gave qualified buyers a 5% credit up to $6,000 and bought down interest rates by around 1.5%, to 7%.
But a historical parallel could be misleading. In 1975, the U.S. was exiting -- not entering -- a recession, one induced by oil prices, and not a sharp run-up in housing prices. "You can offer people all sorts of credits, but if they don't have a job or income I don't know that they're going to take the bait," said Jared Bernstein of the Economic Policy Institute.
Another potential hitch is that creating an incentive to buy, but not a mechanism to refinance existing mortgages, could prompt some people to purchase a new home on more favorable terms and then bail on their existing one. However, banks -- along with mortgage giants Fannie Mae and Freddie Mac -- have tightened restrictions on buying second homes to guard against such a maneuver.
Even critics of the proposal, however, worry that home prices could continue falling to below historical averages for a normal market. "The biggest question is, will there be an overshoot to the downside because of tightening mortgage credit and a declining prices on foreclosed homes," Mr. Lawler said.
Indeed, the debate hinges on how much further economists believe home prices have to adjust before they are in line with historical norms relative to income. Mr. Yun, of the realtors' group, said the NAR's "Affordability Index" shows that most markets have returned to their pre-bubble levels, though he said some of the most overheated markets still have a ways to readjust.
Already, the government has taken steps to subsidize the mortgage market by approving larger loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration, which together account for more than eight-in-10 new loans.
Other critics say that while a large tax credit could motivate buyers to get off the fence, it would do nothing for homeowners unable to refinance mortgages they can't afford, which is arguably a bigger problem.
One idea with broader support -- but with a potentially bigger price tag -- is an interest-rate buy-down that would allow existing homeowners to refinance to lower rates. Chris Mayer, senior vice dean of Columbia Business School, has suggested that the government push interest rates down to 5.25% for homeowners who prove that they can afford to live in their new homes and can document their income.