Stimulus Plan Triggers Real Estate Investment

January 29th, 2008

Move aims at aiding high cost funding in real estate and prevents foreclosures by investors. All those who always wanted to invest in real estate or were contemplating foreclosures, now have some great news to cheer about. The economic stimulus plan initiated by the government has many provisions to tackle the current slack in the housing market and avert the mortgage crisis. It provides many measures in order to ease and aid mortgage loans and reduce cost especially in high-cost housing markets.

For a start, the plan proposes the removal of the cap on the loan amount which can be purchased by these government funded enterprises - Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM) insurable by the Federal Housing Administration (FHA). There is also a change on the cap limit (now increased to $725,000) on these FHA loans; this limit serves as a protection to lenders against any loan defaulters.

These enterprises currently have a provision to guarantee a loan of up to $417,000 in the secondary loans’ market. However, this amount has been increased to $625,000 for a ONE year period as an initiative for buyers to get mortgage loans and /or refinancing. This move surely would aid those buyers interested in investing in real estate in high-value areas like California.

With the existing situation (cap of $417,000) where there is no assured secondary market for loans, lenders assume higher risk in loaning huge amounts to investors in real estate. This in turn allows them to charge a higher rate of interest payable by the borrower – which means that loans are hard to come by and investors heavily opting for foreclosures.

The increase in this cap limit focuses on an assured secondary market thus making it easier for lenders by a reduced level of risk and making it easier for buyers to borrow at lower interest rates for investing in real estate.

This specifically helps those wanting to invest in high-cost areas and promotes real estate development and sales in slack markets. For example, according to Bankrate.com, the existing interest rate difference between loans within the cap limit and those exceeding the cap limit was more than 1 percent on Thursday - 6.39 percent versus 5.30 percent; which means that on a $500,000 mortgage, this difference is about $350/month.

Richard DeKaser, chief economist for National City Corp. indicated that it was about time that such a change was initiated as many analysts agreed that loans exceeding cap limits were hard to avail due to lender flight (situation where lenders refuse to lend funds).

Lawrence Yun, chief economist for the National Association of Realtors said “This will have a big, immediate impact, especially in California where sales have been down most significantly,”. The 1 percent drop is a huge factor, in California, it could create a mini-boom”.

Analysts like Merrill Lynch indicated dire forecasts for housing markets in the next two years; however with this initiation of the Stimulus Plan things seem to look a lot brighter.

An analyst with Weiss Research also welcomed the move stating that this could bring a change in the real estate investor psychology as they are hoping for a price fall. Lawrence Yun also says that with the current situation, there is the existence of a pent up demand for investing in real estate and with this new provision coming in place, buyers who have not yet made up their mind now can definitely vouch for investing.

This move initiated by the Congress and Bush’s administration would bring in changes like a boom in the home sales market, making it easier for buyers to avail mortgage loans and refinancing, thus reducing the rate of foreclosures and also reducing the lead time –from property developers putting up houses for sale to the sale conversion by buyers.