Nearly two months ago, the National Association of Realtors, of which I am a member, submitted their own housing stimulus plan for congressional consideration. The proposal made it to the national news last week, supposedly as a result of a “leak” and is now the subject of many headlines, hype, and debate. The four point plan is ambitious with the goal of providing enough encouragement for buyers to hurry up already and buy a house. Ambitious, yes. Smart, no. Here’s the plan.

(1) Make the current $7,500 first-time homebuyer tax credit available to all homebuyers and, eliminate its repayment provisions. (in its current form, it’s just a loan)

(2) Make the 2008 FHA, Fannie Mae and Freddie Mac loan limits permanent. Currently, those limits have been raised to $729,750, but are scheduled to fall back to $625,000 in 2009.

(3) Use funds from the $700 billion rescue plan (bailout) to institute a temporary federal mortgage interest buy-down program to lower rates to 4.5% or lower for a thirty-year fixed rate mortgage. This would apply to homebuyers purchasing homes up to $1 million in price.

(4) Permanently ban banks from engaging in real estate brokerage.

Funny how the NAR throws that last plug in there about prohibiting banks from entering the real estate brokerage business. They’ve been worried about that for years, and in light of the recent revelations that a bank can barely run a bank, it’s doubtful they’ll try their hand at real estate. The first two points of the NAR plan are valid, and they get this Realtors full support. The third item has been lodged in my throat for a few days now, and I just can’t quite choke it down. It’s a terrible idea, and here’s why.

On the most basic level, the plan pushes government intervention in the housing market, intervention that prevents the market from self correcting like it is prone to do. Why can’t we just let a market correct? Why are we so afraid of taking our lumps and moving forward? When did we become France? This market is already well into the correction process, and will continue to do so with or without government intervention. A rate buy down could possibly create a false bottom, which would provide a temporary blip on the volume radar and ensuing scant applause, but would not provide solid traction for pricing moving forward.

The buy down rate of 4.5% is rumored to be available only to first time home buyers. If it ends up applying to all loans up to $1MM, as I have also heard, that'd be a better idea. The plan in its original form was also not intended to be available for refinancing of existing mortgages. The plan holds up the first time homebuyer as the golden catalyst for all things recovery, and this just isn’t the case. Follow me for a bit. Real Estate markets depend on first time home buyers to start the cycle of transactions all the way up the pricing ladder. Most markets depend on this, some do not. Vacation markets for instance, require first time vacation home buyers to start the cycle, but this buy down wouldn’t apply to them. If we’re going to continue pushing towards government intervention in private industry, can’t we at least get socialism right? The program should be available for all real estate transactions, not just first time homebuyers.

The goal of this buy down is to get a first time home buyer off the fence, and get him to commit to a purchase. What if the first time home buyer is in a market that is still declining? Shouldn’t that buyer sit things out until his individual market reaches bottom? Why would we want to encourage sales just for the sake of sales, without looking at the larger picture? Wouldn’t luring a buyer into the purchase of a home that has a declining price get us right back to where we started? The interest rate savings of roughly 1% (5.5% rates are available right now), on a $100k mortgage amounts to a monthly savings of $61. Is $61 going to convince a buyer that now’s the time to take the plunge? Is $61 going to alter their debt ratios to enable a purchase that wouldn’t be possible before? I don’t think so. Buyers should not blindly purchase only because of a cheap rate, and I don’t think they will.

Speaking of cheap rates, where are all the people who were blaming Alan Greenspan for cutting rates too much and creating cheap money? The people who claim that cheap money was what started this housing mess in the first place by allowing consumers to purchase homes they really couldn’t afford. With this line of thinking, wouldn’t a rate buy down just create more of the same?

I applaud the NAR and congress for undertaking the dirty work of digging though dumpsters looking for ideas. They’re trying. It’s just that they’re looking for solutions in all the wrong places. Allow these markets to correct like they’re already doing. This NAR plan is short sighted and will not provide us with the true real estate correction that is already well underway.

My most recent article appearing on faxts.com and googlenews, reprinted with modifications.