Obama Could Build a Win With Housing Plan
Sen. Barack Obama (D., Ill) might have found his winning issue in the general election while campaigning Tuesday in Las Vegas: his housing plan. Plummeting home prices hurt everyone.
Home prices show no signs of stopping their precipitous declines. The
, which tracks the home prices in the top 10 and 20 metropolitan real estate markets, recorded a 14.1% drop on a year over year basis when comparing the first quarter of 2008 to 2007. The largest drop ever recorded by the index.
Not only would aggressive action from the federal government aid the middle and working class, but it also would boost the stocks of banks, brokers and builders, too.
This pain proves real for homeowners and investors. Almost anyone who purchased in the last several years now finds their home worth less than their mortgage or negative equity. Foreclosures have risen at rates not seen in decades according to
Realtytrac.com
, including the highest rates coming in Nevada, California, and Arizona. Obama knows Nevada will be an important swing state come November.
Obama's housing plan addresses the housing problem from several perspectives. The total plan would cost $30 billion. $10 billion would aid struggling homeowners to avoid foreclosure; $10 billion would help state and local governments suffering the most from foreclosures. He has also pushed for modification to the bankruptcy, which would allow a judge to adjust a mortgage to help prevent foreclosure.
Obama supports the Dodd/Frank housing bill that has passed the House and Senate and awaiting final negotiations. McCain has said he would veto the bill. President Bush has similarly expressed doubt about the bill, preferring a laissez-faire approach.
McCain may alter his position. He initially opposed taking any action to help homeowner but chose to change course in April. He offered a "HOME" plan for those facing foreclosure. It proposes up to $10 billion and would be administered by the Federal Housing Administration.
Both sides agree the housing market requires some measure of stabilization. A comprehensive plan such as Obama's will help both sides of the market: consumers and businesses. It sends a strong signal to all that the government won't allow the market to continue in freefall. It would be similar maneuver to the Fed negotiating the buyout of Bear Stearns
( BSC).
Falling home prices has been the Achilles heel in this housing market. Stable home prices provides for consumer confidence, while allowing builders and financial institutions to perform better in a predictable market.
Clearly, the housing market remains less elastic than the stock market. An immediate rebound in prices would take time, but Obama's housing plan would put the market back on track. And could curry favor with voters who can carry him to the most important house: The White House.
Anecdotal reports from those states and others swing states in the election such as Florida and Ohio have some homeowners walking away from mortgages, a practice called "jingle mail" in the mortgage industry. Numbers remain murky on "walk-aways." But Fannie Mae
( FNM)and
Freddie Mac
( FRE) must perceive it as a serious problem because they issued guidelines restricting walk-aways from receiving another mortgage from their agency -- anywhere from three to seven years depending on the circumstances and a borrower's credit score.
High foreclosure rates and tanking home prices have wreaked havoc on stock prices for banks and brokers. For example, the
Financial Sector ETF
(XLF) - Get Report
has sunk more than 33% off of its 52-week high. Home builders have fared worse. New home inventory has an 11-month backlog, putting pressure on sales prices for new homes built by homebuilders, many of who stocks have lost more than 50% of their values including
Centex
(CTX)
,
Pulte
(PHM) - Get Report
and
Toll Brothers
(TOL) - Get Report
.
The federal government has done little to help homeowners. The Federal Reserve has taken the most aggressive action by cutting rates to 2% and opening the discount window to Wall Street banks and brokers. Lower short term rates have helped firms like
Bank of America
(BAC) - Get Report
and
JPMorgan
(JPM) - Get Report
but offer little help to those interested in lower mortgage rates. According to Freddie Mac, mortgage rates have stayed relatively stable with fluctuations between 6.38 last year in September to 5.92 this April.
The government has also given greater flexibility to Fannie and Freddie on lending allowing for larger jumbo loans, which would help in housing markets like California, Nevada and Florida. Other voluntary initiatives, like the Hope Now Alliance, appear to have had little effect stemming the tide on foreclosures. Moreover, municipal and state governments have been hampered from falling tax revenues from property values. Therefore, a housing plan that addresses the entire problem, could keep Americans in their homes, and place Sen. Obama in a new address: 1600 Pennsylvania Ave.