How to Revive the Housing Market: A Proposal from Realtors

The National Association of Realtors (NAR) is lobbying for the U.S. government to artificially lower mortgage rates by purchasing loan points for home buyers. They say the program would cost $100 billion, and could raise home prices as much as 4% nationwide. Anyone buying a house for primary residence would be eligible for the mortgage-rate buydown, which would lower a purchaser's loan rate 1% for the life of the loan. They say the incentive should be made available for the next 12 months. "The sentiment in Washington is that we need to get the housing market moving to get the economy back on track," says Lawrence Yun, chief economist for the association. "We need to strike while the iron is hot." (Find out 10 things to do with your money.)

But some housing-market economists question the wisdom of the idea. They say helping people who may buy houses in the future is not how the government should be providing assistance. "I can't imagine why you would want to do this," says Dean Baker, co-founder of the Center for Economic and Policy Research, a Washington think tank. "What you should be doing is helping homeowners who are already over their head." (Read "Four Steps to Ending the Foreclosure Crisis.")

The proposal was detailed on Friday at the association's national conference in Orlando, Fla. The group asked the 20,000 members in attendance to sign letters to Congress showing support for the initiative. It is part of a number of moves they are advocating to help boost housing prices.

NAR president Charles McMillan says his organization has "shared the proposal with members of Congress in recent days" but doesn't know whether enough lawmakers would support it. "We don't have a read on that yet," he says. (See pictures of the global financial crisis.)

Home buyers have long been able to purchase so-called loan points, which can lower the interest rate they have to pay on their mortgage. Generally, it costs 1% of the total amount of the loan to lower a mortgage rate by a quarter of a percent. That means on a $200,000 loan, a home buyer would pay $8,000 to lower their mortgage rate to 5.5% from the current rate on a 30-year mortgage of about 6.5%.

The association's proposal calls for the government to pay that upfront fee to lower the mortgage rate instead of the home buyer. Yun says lowering mortgage rates 1% would result in up to 840,000 additional home sales nationwide, reduce the inventory of homes on the market by 20% and boost housing prices. "It would be a significant inducement for buyers to enter the market," says Yun. "We could stabilize the housing market and, as a result, Wall Street and the U.S. economy in general."

The association also says it still supports extending the $7,500 tax credit for first-time home buyers to all buyers and making the tax credit permanent. Right now, home buyers have to pay back the credit when they sell their home.

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