By Don Miller
Contributing Writer
Money Morning

New home construction fell in November by the largest amount in a quarter-century, as builders slashed production while facing the worst economic conditions since the Great Depression.

However, a new blizzard of government money may be coming to your neighborhood, and it promises to be a true bailout for the masses, not just for those in foreclosure or real financial difficulty.

Tight credit and lending markets, rising foreclosures, and surging unemployment figures have homebuyers on the sidelines, pummeling the fortunes of homebuilders such as D.R. Horton Inc. (DHI), Pulte Homes Inc. (PHM) and Centex Corp. (CTX)

“It is going to be a very cold winter indeed for homebuilders,” Joshua Shapiro, chief U.S. economist for forecasting firm MFR Inc., wrote in a note to clients Monday, MSNBC reported.

And the numbers are grim.

The U.S. Commerce Department yesterday (Tuesday) reported that housing starts, where construction has actually begun, fell 18.9% to a seasonally adjusted annual rate of 625,000 units from 771,000 units in October, much less than the 740,000 starts Wall Street analysts expected.

New building permits, predictive of future home construction, plummeted 15.6% to 616,000 units from 730,000 units in October. That was also way below analyst estimates of 700,000.

Housing starts were down 47% in November from the rate in November 2007 and permits were down 48.1%, the largest year-to-year drops since January 1991.

But on the bright side, any slump in new home construction could help U.S. housing market prices recover.

“The more we have less housing starts, the more we can shrink existing inventory,†Steven Goldman, market strategist at Weeden & Co. LP, told Reuters.

The news comes on the heels of a phalanx of trillion-dollar-government efforts and bailouts to banking and government agencies designed to shore up the housing industry. The economy has a variety of problems, but the housing industry is at the crux of any plan to return the U.S. economy to a healthy state.

Obama’s Housing Plan

Some economists are forecasting gross domestic product (GDP) to fall 8% for the current quarter, making the most drastic policy proposals increasingly palatable.

And the latest plan to emerge from the inner workings of President-elect Barack Obama’s recovery team is a stunner, sporting an astounding price tag of $3 trillion.

According to Bloomberg News, the so-called Hubbard-Mayer plan is being studied by Lawrence Summers, chairman-designate of the National Economic Council, and is already “on a fast track at the Treasury.â€

The plan calls for reviving the faltering housing market by providing just about everybody access to a 30-year fixed-rate mortgage with a 4.5% interest rate. That’s almost a full percentage point below the current national average rate of 5.47%. The plan might even be available to existing homeowners who want to refinance their mortgages.

The bottom line: If you have a mortgage, this plan would put extra money in your pocket.

Assume a homeowner currently has a $500,000, 30-year fixed rate mortgage at 6.1%, the average rate issued this year, lowering the interest rate to 4.5% would lower the monthly payment by about $500.

The thinking of the Obama team is that this plan might just be the magic bullet needed to turn the economy around. After all, if Joe Taxpayer’s monthly housing payment drops by $500, he might not be afraid to go out and purchase that new car he’s been eyeing.

The effects from millions of subsidized mortgages like these could dramatically increase the number of homebuyers and help stabilize or even push property values back up.

But the plan could be so expensive that the Treasury may try to limit it to new homebuyers, preventing homeowners who want to refinance from participating.

That, however, might be impossible to enforce. According to one scenario sketched out by experts, creative homeowners could simply draft a friend into an deal under which each would agree to buy the other’s house, grabbing the new 4.5% loan to do so. Then they could quit, claim the deed back, or rent them to each other for the same price.

This mortgage plan is radical, and might just be powerful enough to help turn this troubled economy around. And a $3 trillion bailout would have something for almost everyone.

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Article Source: ArticlesBase.com – With New Home Construction Down, Obama Team Plans ‘bailout for the Masses’

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