How Big is the Housing Bailout?

Digesting the Housing Bailout

Apparently, no one knows at the moment.

I haven't had time to digest the details of the just-announced housing bailout. But what I find interesting, from briefly scanning news accounts, is the discrepant price tags attached to it: I've seen the total cost pegged at anywhere from $75 billion to more than 10X that.

No doubt, that's partly because no one knows how much government guaranties, matching commitments, etc. are ultimately going to cost.

But I think it's also a case of: 1) initial vagueness in the details (which you'd certainly expect, given the dollars involved); and 2) no one really having had a chance to absorb what details were offered.

More to come . . .

$8,000 Tax Credit Q & A

Parsing the Home Buyer Tax Credit

Realtors are already fielding questions from clients (see below) about the newly-passed $8,000 tax credit for home buyers.

Details are still sketchy -- the stimulus bill's provisions repeatedly shifted -- but the gist of it appears to be: 1) a scaling tax credit of up to $8,000 (not the $15,000 floated at one point) -- the formula is actually 10% of the home's price, so you max out buying anything over $80,000 (pretty low threshold); 2) a phase-out based on income levels; and 3) no repayment (it's a true credit).

As the details emerge, I think a lot of America is going to discover (remember?) how bad they are at math, and why they hated it in school!

Q: I read a news account saying that the $8,000 tax credit for home buyers is refundable-- does this mean that those paying less than 8K in taxes will be refunded the difference?

A: No. The "refundable" part is that you pay your taxes, then get a refund for whatever part of the $8,000 credit you qualify for. So, if you paid $5k in federal taxes and bought a $100,000 house, you'd qualify for the whole $8,000 -- and therefore get the whole $5k refunded. (You'd actually qualify for 10% x $100k, but it's capped at $8k).

If you pay less in taxes than the credit you qualify for, you leave that money on the table -- you can't get a refund for taxes you never paid. So in the case above, you're "out" $3,000.

Still confused? Just ask your Congressman -- they'll know!

Seed the Bottom of the "Food Chain"

Scorning the Financial Gods --
And Paying the Price

After the tech bubble, the healthy and natural progression dictated we enter recession. Alan Greenspan never allowed us to take that medicine, opting instead to inject the economy full of fiscal and monetary drugs. The resulting imbalances steadily built through the years and arrived at our doorstep with a thud. It’s not wise to mess with Mother Nature. We’re now witnessing the other side of risk gone awry and the cumulative comeuppance of a scorned business cycle.

--Todd Harrison, "The Future of Wall Street"; Minyanville (2/11/09)

If Harrison's take is right -- and I believe it is -- a couple conclusions and observations logically follow:

--Beware of cures that are worse than the disease (anyone else have deja vu right now?). Or, if you want a "folksier", Upper Midwest analogy: don't drive your car into the ditch -- or oncoming traffic! -- just to avoid a deer.

--The stage we're in now could be called "financial de-tox." It's perfectly appropriate -- and maybe even life-saving -- to use "financial methadone" ("hair of the dog," etc.) to help an acutely addicted patient wean themselves from their addiction (I put tax credits for home buyers, stimulus spending, federal aid to states, etc. in that category). Just be clear that that's what you're doing, and that such a strategy is temporary.

--There's something deeply ironic (if not foolhardy) about relying on an institution, The Fed, that helped cause today's financial melt-down to oversee its rescue. Ditto for too-big-to-fail financial institutions, GSE's ("government-sponsored enterprises") such as Fannie Mae and Freddie Mac, etc.

--Instead of breaking with past financial blunders -- and sequestering flawed institutions -- we appear to be doubling (if not quadrupling) down. In that vein, you'd speculate that, once the financial dust settles, there will be calls to strip the Fed of some of the vast new powers it now wields (and to unwind what now very well may be the world's scariest balance sheet -- ever).

"Financial Food Chain"

Life does go on after the meterorite kills off the dinosaurs, the forest fire clears away the old giants, etc.

However, we would do well to *mimic how nature regenerates herself after such cataclysms: not by resurrecting the species at the top of the old, collapsed food chain but by seeding -- literally -- those at the bottom.

The meek may not inherit the earth, but birds and all types of microscopic plants sure seem better adapted to -- indeed, capable of adapting to -- a new and dramatically leaner environment.

*Manufacturers are just now beginning to exploit the secrets of what's called "biomimicry" -- for example, studying how a spider makes silk that is stronger, ounce for ounce, than tensile steel, while using vastly less energy and creating none of the waste or pollution.

Tax Credits vs. Low Rates

The Right Stimulus for Housing

There now seems to be a clear consensus that, to help the economy, government must first do something to help housing. However, there's still no consensus about what.

The two leading strategies are:

One. Using taxpayer money to basically subsidize mortgage rates down to some previously unheard of number, like 4% or even lower.

Two. Using tax incentives to motivate prospective home Buyers. There are various proposals being floated, but the basic idea is to give Buyers up to a $15,000 tax credit.

The debate isn't just over what will stimulate housing the most for the least cost, but which strategy will help housing the most long-term (or perhaps, hurt it least).

In that vein, some critics of the "cheap money" approach are concerned that that will just set up housing for another fall down the road. It's one thing to qualify for a mortgage, they point out, but completely another to be able to afford that mortgage if home prices drop and/or the economy contracts.

Lenders in Florida, Southern California, Las Vegas, Arizona and many other locales can you tell you all about that . . .