While the Treasury Department recasts its TARP program and the auto makers see the prospect of their bail-out slip away, the FDIC announces that it wants to go for the source of the problem –foreclosures.
Stemming the tide of foreclosures makes sense, but so would a focus on getting real home-buyers –not speculators– back into the market for houses. Much more than even the Detroit car companies, the nation’s homebuilders drive the economy and also the American dream, but the financial crisis has chilled homebuyers’ interest and their options. Mortgage interest rates have not fallen significantly as the Fed has cut its rates, and although housing prices have reached affordability levels not seen in years, would-be buyers aren’t showing up for fear that the bottom hasn’t yet been reached though almost every expert counsels against trying to time the bottom.
One suggestion is a short-term interest-rate buy-down program sponsored by the federal government. If a home buyer qualifies, the feds would provide the funds to buy down the mortgage interest rate below market levels. If the program carried a relatively short window –the first quarter of ’09, for example– a strong incentive to buyers on the sidelines but eager to enter at the right moment would be created.
Jump-starting the home-building/repurchase business is a stimulus that goes directly to consumers and requires very little in the way of bureaucratic build-up.
As I’ve said many times here, there is no shortage of money, nor any shortage of credit on an economy-wide basis, despite the continuing popular perception that banks are not lending and the economy is being strangled for want of credit. The problem continues to be a shortage of buyers, and that has a lot to do with a lack of confidence. Faced with tremendous uncertainty and a barrage of bad news, everyone is pulling back. But they could just as easily regain their confidence and start spending again. This is not a scenario that leads us to the end of the world as we know it, but that is what the markets are braced for.