The Hole In The Presidents Economic Plan: Housing

President Obama went before Congress last Thursday night to introduce his new $447 billion jobs plan to the American people and as expected, it received cheers from the left (or at least, center-left) and jeers from the right.

As usual, my curiosity was not as much in the political tone, but how housing would be tied into the plan. An improved housing market will go much further in helping create jobs, than a weak one.

Unfortunately, the speech only briefly discussed housing and the suggested fix: refinancing much of the country's housing debt down to today's historic low interest rates. While cutting rates will certainly help, I still believe principle reductions are the way to go.

Consider the following: Take a home where the current mortgage balance is $200k, but the home has dropped in value to about $100k. If you lowered the interest rate from 6% to say, 3%, the monthly payment would drop about $350. Helpful? Sure.

However, if you reduced the principle from the mortgaged amount ($200k) to the current value ($100k) but left the rate as it was at 6%, the payment would drop by almost $600. Now we're talking!

Include the reduced (3%) interest rate and we're looking at the payment dropping by over $780 - now we're really going to fix some problems: housing will begin to improve dramatically as people not only have incentive to stay in their homes, but more people will have incentive to buy. Further, the amount of disposable income would increase dramatically, giving the economy a much needed cash infusion.

Consider this: LPS Applied Analytics once estimated that people who hadn't paid their mortgages in at least three months, would add a cash flow to the economy that could amount to about $5 billion a month. If people continued to pay their mortgages, but at a greatly reduced rate, the influx of cash might not be $5 billion, but it would be significant.

Keep in mind, lowering rates alone won't really help when it comes to selling the home – people will still be underwater and foreclosures, short sales, etc., will still be abundantly prevalent.

Lowering the principle will help get money back into the economy AND allow homes to sell once again as they had prior to the market crash. Perhaps not as important as creating jobs, but close...