Fresh from the Milken Conference, Insider Notes

Richard Smith, the Chairman of Realogy (Parent company of Century 21, ERA, Coldwell Banker, and Sotheby’s International Realty) came by our office today to update some of the Coldwell Banker Brentwood agents about the inside happenings at the Milkin Global Conference (follow on Twitter @MilkenInstitute ).  Keynote speakers include Mohamed El-Erian, Steve Forbes, Kenneth Griffin and John Micklethwait, Antonio Villaraigosa, Michael Boskin, Douglas Elmendorf, Jim Goodnightand Michael Miles.  Of the topics being discussed: Financial Recovery: When and How?, and U.S. Overview: When Will Growth Resume?.

Smith sits on The Business Roundtable, an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees. The Business Roundtable unites top CEOs from leading companies, amplifying their diverse business perspectives and voices on solutions to some of the world’s most difficult challenges. Smith is part of an advisory panel on general economic conditions, reporting to Congress and the Treasury Department, and today gave an insider view on the workings right now in Washington as pertains to the economic downturn and recovery process.

According to Smith, “Housing leads the economy in and out of a recession.  Housing is first in the downturn, and first to recover.  If we can’t fix housing, we won’t fix the economy. But with a stabilization in interest rates at about 4.5%, and a $15000 Federal tax credit for all homebuyers, housing will correct quickly.”

The consensus of the Business Roundtable is that, while Congress has taken upon itself the plan to address loan modifications as their solution to the housing crisis, this is not a viable solution to the economic downturn. “Loan modifications are at best a short term fix,” according to Smith. ” And statistics show that 50% of modified loan homeowners never make even the first payment after modification.”

So what, then, is the solution?  Smith thinks that a combination of a low mortgage interest rate, approximately 4.5% fixed, in conjunction with a homebuyer tax credit of $15,000, for all home purchasers, including investors, will do more to stimulate growth and consumer confidence. “Buyers are waiting for the floor on both interest rates and price,” says Smith, and providing them with low rates and tax incentives are the stimulus most buyers need to step into the market now.” (see my post on Timing the Bounce)

Smith thinks the bailout of  100% loan-to-value properties is a mistake.  Those homeowners have nothing invested in the property, and have what Smith calls a “renter’s mentality”.  For the sake of the taxpayer, he recommends that the government spend their dollars with those homeowners who have equity in their property.

And what about the proposal to eliminate the mortgage interest deduction?  Smith says that every member of Congress knows that is not a viable option, and would never pass.

Smith says economists speaking at the Milkin Conference believe that the housing price correction will occur as late as 2010 or early in 2011.  “But theory”, says Smith, “is different than practice.” The members of the Business Roundtable, who are practicing in the real world, believe the uptick will occur in late 2009 or early 2010.  As Smith puts it, “the mid range properties need to sell.  30% of the market is first time buyers.  Beyond that, consumer confidence will drive the middle markets.  And until the high end starts correcting, we do not have a fully corrected housing market.”

The Business Roundtable believes the basic interests of business closely parallel the interests of American workers. The organization is selective in the issues it addresses, a principal criterion being their potential impact on the economic well-being of the nation.  Their timely focus on the housing market’s economic downturn, they believe, will help the business climate in general, and consumer confidence, which is at an all time low.

Of particular note in Smith’s remarks today: Senator Johnny Isakson, (R-Ga) a former Realtor®, has attached a rider to the 2010 Federal Budget Resolution offering support for the $15,000 tax credit.  As you may remember, Isakson initially offered an amendment that would provide a tax credit in the amount of $15,000 or 10 percent of the purchase price, which was ultimately reduced to $8000.  And so, the debate continues.