How Obama Could Help Stabilize Home Prices by This Fall

Will housing really be shored up with President Barack Obama's expected plan to aid homeowners coupled with his signature yesterday of the $787 billion economic stimulus bill?

One school of thought says it will. Here's how:

• The stimulus package will increase tax credits for home buyers to $8,000. Walter Molony of the National Association of Realtors told me that this should result in 300,000 more home sales within a few months.
• Fannie Mae and Freddie Mac will be able to handle loans for higher-priced homes, specifically up to about $750,000. Molony believes this will result in 150,000 more near-term home sales, especially in high-priced markets such as San Francisco where expensive homes in that range are quite common.
• Previous measures by the Bush administration to lower interest rates on mortgages is expected to boost home sales by about 400,000.
• Obama's announcement today to help homeowners facing foreclosure with a $75 billion rescue package will indirectly help home prices overall by stabilizing markets and reassuring lenders.

Is this too optimistic? I'm not sure. Molony says his organization will update its market forecast by March 3. And, there are certain to be naysayers who note that the problems in home buying are still enormous and that Barack's remedies don't go far enough.

Another issue is the morality of bailouts. Some commentators such as Arianna Huffington insist that if the federal government can bail out Bank of America and Citigroup for their financial errors, then everyday homeowners deserve some help. She's also worried that the Obama team of Treasury Secretary Timothy Geithner and economic adviser Larry Summers reeks too much of Wall Street cronyism similar to the Bush administration.

Conversely, one view has it that many homeowners got themselves into trouble by accepting loan terms they couldn't handle and speculating by trying to flip several properties at once. As a New Yorker piece notes, one Fort Myers real estate agent sums it up by saying "Greed and easy money, that was the germ."

There are worried that Obama's bailout to homeowners facing foreclosure will be too expensive and troubled mortgage holders will walk away from bad deals anyway. A study by the Federal Reserve of the Boston market downturn in the late 1980s and early 1990s suggests that won't be the case. The walk away rate was actually quite small.
If this is the case now and Molony's predictions are right, maybe there's hope sooner than we thought.