Re: Should be burn excess homes in an effort to stabilize the economy?
Posted by:
quantum
()
Date: April 13, 2009 12:13PM
ToneLocian - you actually are failing to engage in debate, and I think Justin's tongue in cheek reference to burning houses is a good kickstart.
Here's the score. We have had years (20 years) of artificially cheap credit - lots of blame to go around, but Government policy pushing mortgages (and home equity loans) to large groups of people that never should have been borrowers certainly didn't help. And one can argue politics - but who cares? We didn't take proper credit of the commodity called money - letting it rot, so to speak, as with old wheat in the silos. And that shoddy treatment of money had led to the exact opposite result of what anyone would want from a housing policy. Yes, home ownership was "increased", but that was illusory since the default rate amongst those "new" homeowners is sky high. They are experiencing foreclosure and even if they somehow escape that, are entering into loan modifications that will make them stuck in zombie loans worse than being a permanent renter. And giving them massive write-downs of principal amounts is unworkable too - the banks are not prepared to take the drastically reduced marks (many of them are insolvent). And even worse, housing prices are unrealistically high, still way above any reasonable asset price to income ratios (which should not exceed 3.5 or so to 1). We have a bubble, and the only way to get a sane housing policy and get the housing market going is to deflate that sizable bubble.
So would I would look for the Government to do is indeed "let the fire burn' by permitting asset prices to sink to levels at which responsible owners and investors can buy. This means no furtive monkeying around with interest rates to keep "prices" up, no keeping people in homes that never should have been there to avoid foreclosure - these people are not losing equity, but frankly months of free rent, and letting the market hit asset prices where people can once again buy. To some extent Obama's plan gives this idea lip service but because it really wants to inhibit and slow the deflation of the bubble it will likely cause a drag on the economy. To be fair - this is a tough thing to do - getting the pain over with quickly and in an intense way.
In many areas of the country the deflation is starting to happen, so likely a good thing is before us.
But the low income areas are so challenging. Not only is the default rate (and the fraud rate) high, the recovery rate in foreclosure is appallingly low because the residents take such awful care of the homes once behind on the loans, and the neighborhoods really begin to decline (our buddy Barney Frank ought to remember this when he starts pushing naive mortgage subsidies again). And because the recovery rate is so low, the banks have more pain in store than they ever have modeled. I am not sure what to do in these communities - our mortgage policies could cause a rapid and devastating ghettoization of these places - with real negatives and dangers associated with it. This may justify economically irrational Government intervention because the alternatives are just too grim.