A powerful and cheap stimulus *

THE ECONOMIC crisis began with a collapse in the housing market and probably will not end before the housing market enjoys a real recovery. While home prices are no longer plummeting, many potential homebuyers are waiting to see whether this is a safe time to enter the market. Sales of previously occupied homes rose in 2009 for the first time in four years, but sales could fall again with the end of the extended home buyer tax credit in the spring.

In repairing the economy, President Obama and Congress face a dilemma. More economic stimulus is needed, yet there is little appetite for expensive new government programs with the federal deficit running more than a trillion dollars. What we need is a new policy, one that could garner bipartisan support, would likely cost the government little or nothing, but should spur many credit-worthy homebuyers to buy now and help rejuvenate the economy.

Here is one idea worth trying. The US Treasury in conjunction with the Department of Housing and Urban Development should put in place for the next 18 months a home price insurance program providing a form of catastrophic loss protection for homebuyers taking a chance on the current housing market.

If families knew that they were insured against taking a large loss on a home bought this year or early next, many would likely begin looking for a home to buy. After all, if the program were in place and they postponed purchasing, they not only would lose the insurance option after eighteen months, but if many others took advantage of the program, they might miss the bottom of the market altogether. That should give enough encouragement for several million homebuyers to move quickly, taking much of the current inventory "off the shelf" and encouraging new home construction.

To qualify for the insurance, which would not cost more than $500 to cover administrative expenses, a home for sale would need a full and fair valuation by a licensed qualified appraisal firm and a home inspection by a licensed inspector. To discourage speculators from entering this market, the insurance program would be limited to owner-occupied properties with no more than three housing units. The purchaser would be required to obtain a conventional mortgage and pay a minimum of 10 percent down. To assure that homes are not "flipped," the insurance would only be paid if the homeowner held onto the property for a minimum of three years with the possible exception for homeowners who faced an economic calamity due to an unexpected health problem or long-term unemployment.

Once the homebuyer resells the property, the government would pay 85 percent of any loss between the original purchase price and the subsequent selling price after deducting mortgage closing costs on the original purchase. The homeowner would be responsible for the rest. The maximum insured loss would be limited to $100,000.

If few take advantage of this new program, the cost to the government would be trivial. If a large number of buyers come into the market, increased housing demand would contribute to stabilizing prices and therefore negate the need for paying a large number of claims.

Three years from now, almost everyone expects home prices to be higher than today so the risk to the federal budget is tiny. But even under an unlikely worst case scenario where one-fourth of the homes insured somehow suffered a staggering 22 percent further decline in prices - the price drop used in the worst case scenario when the Treasury stress-tested the banks for TARP funds - the cost to the government would be less than $10 billion on a million insurance policies.

The US Congressional Financial Services Committee has already drawn up draft legislation for such a plan. This would be a great time to dust it off and try to pass it. If it works, all kinds of good things could happen. Home prices should quickly stabilize, the current pressure on rental markets would begin to subside as some renters move to homeownership, the number of foreclosures because homebuyers are "underwater" should decline, new home construction would begin to become profitable, and a good number of jobs would be created. Not bad for a stimulus on the cheap just when we need it.

. Barry Bluestone is the dean of the School of Public Policy and Urban Affairs at Northeastern University, Editorial published in Boston Globe, February 3, 2010



Barry Bluestone

Professor Emeritus of Public Policy and Urban Affairs
Northeastern University