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...raises the question as to whether the government should be offering low mortgage rates all the time, not just during a crisis," says Laurence Yun, chief economist of the National Association of Realtors, which has been pushing for a plan to lower mortgage rates for the past month. Yun predicts lowering 30-year fixed mortgages to 4.5%, from their current rate of 5.5%, would produce an additional 500,000 home sales in the next year. "We need to do this because the economy will not stabilize until home prices stabilize," says Yun. "The way to do that...
...critics of the plan say that is will do little to boost sales, and could wind up being surprisingly expensive. Here's their math: In order to get lenders to make the loans at below market rates, the government would have to basically pay banks the difference between the market rate and the 4.5% they would like banks to lend at - currently 1%. That would still leave a profit of 0.8% on every loan the government helped originate through the program...
...these are not normal times. Right now the foreclosure rate is running at 3%, and it could ratchet higher in the next few years if the recession drags on. The government could mitigate its losses by only lending to people with high credit ratings. But even high quality borrowers will default at higher rates in a down economy. At a 3% default rate, the plan could cost the government as much as $25 billion a year. And that's only if 10-year Treasury rates remain at 2.7%. A year ago, the government bonds yielded 4%. At those levels...
Harvard's Glaeser calculates that in a stable market reducing mortgage rates to 4.5% would boost home prices by 5.2%. But this isn't a stable market. Before the announced plan, housing prices were expected to drop as much as another 20%. That means the Treasury's proposed mortgage rate cut will fall well short of stopping the continued fall in real estate prices. "All of these subsidies end up with taxpayers holding the bag," says Glaeser. "It's a terrible idea...
...What is important is not the numbers but the fundamental goal that people must stay alive,” he said. “In Botswana, thanks to the initiation of government spending and international help, the life expectancy of infant population increased at a rate of five years per every year since...