The National Association of Realtors feels that anything that reduces the prices of houses is a bad deal. Their argument has some justification, because when the price of a house reduces to a value less than the obligations (liens, mortgages) standing against it, then we have a recipe for foreclosure. However, that is not their real motivation. Lower housing prices mean lower commissions, as most commissions are based on a percentage of selling price.

Personally, I think that we should be looking at housing affordability, in other words, what combination of factors will allow MORE people to actually be able to OWN homes? We need a combination of low interest rates, favorable mortgage terms, and low housing prices.

The problem in all of this relates to how housing prices are set by the marketplace. The rental market has an impact on this, because most people who are looking to buy a first home currently rent a house or apartment, and they will be trading a rent payment for a mortgage payment. They will also be divesting themselves of some level of their personal savings for a down payment and/or closing costs.

A person who is accustomed to renting will take a look at the family budget, and determine what amount can be allocated toward a mortgage. Most people overlook all of the extra costs that go into owning a home, including taxes and insurance, maintenance, water, trash collection, etc., but we'll ignore those costs for the moment.

If a family determines that they can afford $1,200 for a mortgage payment, they will volunteer this fact to their mortgage broker and Realtor®. In turn, a determination will be made as to how much house that family can afford. If interest rates are at 5.75% (a currently available fixed rate), then this relates to a principal amount of about $207,000. Assuming that the family has the proper down payment of 20%, this means that the family can afford a house valued at about $260,000.

Now, the Realtor's job is to find a house for which the family is willing to spend $1,200 per month. So, the family will look at the marketplace of houses, and determine from the range of homes available, which is worthy of their $1,200 per month budget. As a result, all houses in the market that justify a monthly expenditure of $1,200 will be worth about $260,000. This is a simplistic depiction of how retail housing prices are set.

What can complicate this scenario and formula is when the government (or the Fed) steps in to try and affect the housing market. Here are some items in the budget, which are supposed to help the housing market. Analyze each, and try to determine what effect each will have on the cost of housing. Then, determine the effect each measure has on the affordability of housing:

1. An income tax credit for first-time home buyers of $8,000

2. A reduction in the mortgage interest deduction for families earning over $250,000 per year

3. $100 down payment mortgages on FHA loans to buy HUD repos

1) An income tax credit for first-time home buyers will increase the price of houses by making more money available for the purchase. In other words, no one likes to leave money on the table, and the sellers will grab whatever is there. The downside to the credit is that it is only applicable to purchases that occur by first-time home buyers in 2009, which eliminates a large part of the buyer pool. In addition, the credit won't be received until 2010, so it is not available for down payment money. (Higher Price, Lower Affordability)

2) Lowering the mortgage interest deduction will actually reduce housing prices, because the net cost of ownership in high-cost areas will increase, when those capable of making the higher payments have a higher net cost of ownership, due to this tax increase (Note: A reduction in tax deduction has the same effect as an increase in tax). (Lower Price, Lower Affordability)

3) $100 down payment mortgages increase the prices of homes by increasing demand. The offset here is that this program only applies to homes that have lost value and been subject to short sale/HUD sale auctions. The minimal down payment does not reduce the price of the homes, but this will help to provide a bottom for housing prices in some markets. (Price Neutral, Mixed Affordability)

This gives us three initiatives, all of which will increase the NET COST of owning a home, thereby decreasing affordability. If the government did not get involved, housing prices would continue to fall, thereby making homes more affordable for everyone.

Oh well, at least the government tried to help out.