The Stimulus Package: The Good, The Bad and The Ugly

Hello Hampton Roads,

Henry Hazlitt makes a valid point to look beyond the Now and see the consequences of Tomorrow. Let’s apply this lens as we take broad look at the President’s stimulus package and how it affects you, the real estate industry, and the nation.

Congress is being asked to approve at $150 billion dollar stimulus package to revitalize the economy. The House has already approved the package and it is being debated in the Senate. The package calls for a tax rebate of $600 per individual and $1200 per couple and additional $300 per child. The rebates are based on income eligibility and would be capped at $75,000 adjusted gross income for individuals and $150,000 adjusted gross income for couples. Thats 117 million families who would be eligible for the rebate. In addition, businesses would also receive $45 billion in tax incentives.

In terms of real estate, the package provides for an increase in loan limits for FHA, Fannie Mae and Freddie Mac. FHA loan limits nationwide will be set at a floor of $271,050 to a maximum of 125% of local median home prices. The NAR (National Association of Realtors) states that these increases will help 138,000 Americans to buy homes and 200,000 families to refinance safely and affordably. The conforming loan limits on Fannie Mae and Freddie Mac are currently capped at $417,000 with anything above this amount being considered a jumbo loan. The new limits will be somewhere between $625,000 and $730,000. Since August 2007, the interest rates on jumbo loans have been 1% higher than conforming loans and this can cost homeowners up to $400/mo in interest payments. The NAR also states that by increasing the loan limits, borrowers will see immediate relief with new liquidity in the mortgage market and the nation will see an additional 300,000 home sales. This is all good news for the real estate industry which could use some good news.

But is it as good as it seems and what about the long term effects?
Well for starters, there is no guarantee that it will revive the economy. There is no mandate to spend the rebate on new goods and services and it may be used to build savings or pay down current debt which will not boost the economy.

The tax rebate is targeted to people that the government believes will spend the money to boost the economy. But the rebate is really income redistribution. Many people who paid income taxes may not receive anything back at all. In addition, the Senate Finance committee is looking to expand the rebate to include 35 million families who otherwise would not be eligible to receive it because they paid no income taxes at all. In other words, money that was paid by other tax payers who may receive nothing is being redistributed to others who may have paid nothing.Finally, it is hard to ignore that the deficit hovers at $162.8 billion mark (for fiscal 2007) and that the cost of the additional $150 billion will only add to the national debt.

So where will the additional $150 billion come from you ask?The printing presses. Printing money and increasing the money supply as we well know, devalues the currency and increases inflation.

You can't spend your way out of debt.

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” --Henry Hazlitt from Economics in One Lession

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