Let housing find its clearing price

By J Saft
February 20, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The U.S. government should just get out of the way and allow the crash in U.S. housing; the market is too big, has too far to fall and Americans’ finances are too strained.

President Barack Obama’s measures, unveiled on Wednesday, are part of a $275 billion plan to try and stabilize the housing market and prevent foreclosures. It aims to encourage lenders and their agents to cut repayments for homeowners in difficulties to lower, more affordable levels as well as other steps.

The reasoning is that there is a largish group of borrowers within the U.S. real estate market who may slide into default because their loans are too big and expensive or because they have run into temporary cash flow issues.

Give them a cheaper loan and you break the circuit of foreclosures, more stock coming on to the housing market driving prices down further and giving other mortgage borrowers more incentive to simply walk away from their debts.

There may be some who are successfully modified out of their troubles, but they will be outnumbered by those who will only default again, or even worse in some ways, by those who keep paying on an asset that isn’t worth the underlying loan.

“You probably have about two to three million homes that we overbuilt, a lot of those have to be converted to rental units. We overbuilt on the high end of the market. We just don’t have enough people in this world who can afford these high-end homes,” said Paul Miller, a banking analyst at FBR Research. “Government should just get out of the way.”

While the maths often cited is that a repossession and sale can cost a lender 50 percent of the value
of the loan, that rather attractive number hides the fact that modifying loans successfully is just very difficult.

Data from the Office of the Comptroller of the Currency shows that more than 53 percent of loans modified in the first quarter of 2008 had re-defaulted again within six months. Nearly 36 percent went bad within just three months. And this was when the U.S. economy was in better shape than it is today and unemployment lower.

Now it may be that those modifications were given to the wrong people and under the wrong terms, and it may also be that the new plan makes that all right. But I doubt it.

LET’S FIND A CLEARING PRICE

The Mortgage Bankers Association did a study in 2008 http://www.mortgagebankers.org/files/Research/LoanModificationsSurvey.pdf that found 70 percent of foreclosures were on properties either not occupied by owners, were on borrowers who could not be found or did not respond, or on borrowers who had already had a modification and were defaulting again. Of the 30 percent not in those categories must surely be quite a few of tomorrow’s re-defaulters!

The housing rescue plan is in part an attempt to rescue banks, whose balance sheets will be further undermined by falls in house prices and defaults causing many more failures. The bottom line is that many Americans who now have mortgages would be better off renting.

American consumer balance sheets are incredibly stretched. The average American has perhaps 30 percent of equity in his house, but that hides the people who own outright, thus leaving a huge rump, especially at the bottom end, who have very high loans-to-value. About 28 percent of mortgage borrowers now owe more than the value of the house, according to Zelman & Associates. And with stocks down 45-50 percent their assets have shrunk more alarmingly, leaving them less good risks.

There is an absolutely credible argument that many Americans, particularly less well off ones, would be better off out of home ownership entirely. They would rid themselves of the yoke of a mortgage on an asset which, even after a principal write down, may not end up being a good investment.

“They are going to try and keep you in a home that arguably you don’t want to be in. You might be able to go up the street and rent for half the price,” said Ivy Zelman, a housing analyst who was early in identifying the issues.

A person paying rent and with the flexibility to move to where there are jobs is better off than one anchored to an underwater mortgage in a town with high unemployment, even if the lender has to go bust in the process.

Prices of housing in the U.S. were driven too high by too much leverage even as supply increased. Let’s accept that, allow prices to fall, the banks to fail and start again on a new stable footing.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, click here. –

81 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Capitalism for for everyone except the rich and large companies. For the rich and large companies it’s socialism.

Let ‘banks’ fail. Let car manufacturers fail. Let all big companies which are not profitable fail. The same rules should apply to the rich and large companies and ‘the little guy’ (including small businesses). If you can’t pay your debts, you loose. Start at square 1.

I’m sick of hearing garbage like “too big to fail”.

Posted by Jelly Roll | Report as abusive

In the study of Economics a natural correction has always proved to be the best in the long run. The problem here is much deeper than all the articls I have read so far. When you buy a home on a thirty year note you may be paying over 200% interest on your home. Yes you become an indentured servant to the system for the rest of your life. Excues me but 200% is a usury fee and should not be legal. I DO have a fix for this situation but it would take an indepth explanation.

We as a nation have forgotten our roots. Our nation was founded on strong Christian beliefs and principles. I direct you to Psalms 15 “O Lord who may abide in thy tent”. Granted this is from the Old Testemant and I belive it still applies today. I invite you to read the rest of this Psalm yourselves (This should be easy even for the illiterate, it is only 5 verses long).

When I studied Economics one underlining principle is “When ever the goverment takes over a market or process it costs us more and we don’t get as good of a job done”. Or as the writers of our Constution said “The least goverment is the best goverment”. Let the market naturally correct itself!

Posted by Robin Pierce | Report as abusive

Real estate is foundation of any economy as we witnessed in this crisis. Banks and individual’s irresponsibility in sub-prime mortgage is where it started but it now spread far beyond that. Many responsible borrowers are experiencing the hardship through no fault of their own in this continuing cycle of unemployment and market reduction.
The plan is supposed to help these people stay in their homes as it also is not in the bank’s interest to foreclose homes. Simply freezing the payment for 6~12 months is better solution than keeping these unoccupied and unmaintained homes that they can’t even give away.
If we let the housing market crash, entire economy will crash and will take a decade to recover. Start again in new stable footing? You’re basically proposing 1930. Instead of sitting behind your computer writing every spontaneous thoughts that comes to your mind, go out to areas like downtown Detroit to actually see what a neighborhood full of boarded up house does to the economy. Because you’re talking about people’s home and livelihood.

The Federal government could give rental housing a big boost by allowing rental payments to be fully or partially tax deductible. They could also allow consumer credit to be deductible I suppose. I don’t think I fully understand why mortgage interest but not interest paid on all the stuff within the average home, isn’t. The house and the “stuff” are all commodities. The financing of all that stuff keeps the economy active.

Here is one dandy stimulus check. The Government could overnight make part or all interest on consumer debt tax deductible. But that is probably so much more than the payments or credits they have already tried. I suppose the tendency would be for every tax payer to take on finance charges equal to the tax bill.

Owners of rental property have problems with rent collection and expensive and time-consuming court procedures in cases of eviction. Those are the thousands of “defaults” that few ever hear about and that never sink an economy. In the small rural town I live in – there has been little or no rental unit construction for almost 20 years. The rents tend to be high and the units are difficult to maintain. New York City buildings will probably never conquer the cockroach. I know that many people choose home ownership over renting because they have the advantage of a tax break on mortgage interest.

The US government has encouraged home ownership for decades because rental housing and especially public housing is not popular. No one ever really wants to live in it or pay for it. Public housing doesn’t get the care that people expect and willingly provide a private home. And I think that both Gov’t and Wall Street appreciate that the homeowner will spend a fortune fixing and furnishing a private home. That is good for the economy. Renters probably do not and cannot alter or remodel. I don’t know of any study to prove this point but I suspect renters aren’t as large consumers as homeowners are. You realy don’t need a study – were do you get more closets, basements and attics? In an home or an apartment?

Zoning laws in most US communities seem to be very restrictive about allowing homeowners to sublet parts of their own homes. That might actually allow some people to stay afloat. Traffic generation and parking of cars becomes an issue to abutters. Gated communities and many condos also have the extra expense of maintenance fees on top of real estate taxes. Many of them are in sever trouble now I suspect.

But I agree with the writer that the bubble should be allowed to burst because it can’t do anything but burst. Not even the Federal government has enough hot air to re-inflate it. How to you “finance” irrational exuberance – if not outright hysteria? And I wish that would dawn on the town assessors. They still think the high bubble valuations are the true value of the property around here. I think they are waiting until inflation forces the numbers out there to match the values in their files.

Brilliant! Just let the banks fail. I don’t have a mortgage so why should I care. Just give me fair notice so I can take out my savings before the banks lock their doors.

Funny that the right wingers don’t want to teach Darwinism in the schools but they sure like to watch the weak and stupid starve to death.

Posted by lorenzow | Report as abusive

LOLOLOLOL!!!! BURN the valueless houses down!!!

I laught at all those stupid people “misled” by greedy home brokers to buy houses they couldn’t afford.

Posted by somson | Report as abusive

The only solution to the economic crisis is…the US dollar needs to be devalued to about 60% of its current value.

Posted by Lance Baker | Report as abusive

Anybody who could LEGITIMATELY afford a home still owns one. By the way 93% of the employable population is EMPLOYED. Comparisons to the Great Depression are foolish.

Posted by Turista | Report as abusive

TOXIC ASSETS?? These houses NEVER were an asset. Let them foreclose so the market can find its REAL, not fictional, value so we can get on with life.

Posted by JJ Bean | Report as abusive

“They depreciate. So does a house.”

What so a house 30 years ago sold for the same or less as today? Even factoring in repairs?

Yes you pay for taxes, improvements, etc on your house. But so does a renter, how do you think a landlord makes money? You pay the landlord’s property tax, improvements and get this, his PROFIT, in the rental check you write every month.

Posted by Dusty | Report as abusive

I agree with the article almost 100%, the brokers and banks need to feel the consequences for their sins- Pride, greed, arrogance, and love of money. the people in the homes need to feel the consequence of their sin- Pride, greed, idolatry and arrogance. I believe that only when Americans (myself included) feel and experience the consequences of our actions will truly be motivated to change. I think for too long there has been an attitude of “lets get bailed out by taxpayers”. Maybe if these said individuals were out of a home, on the street and forced to rebuild.

Maybe if the bankers were forced to look for new work, curb their own expenses and appetites would change then occur. And for all of the babbling about Wall Street salaries, wall street was just a small piece of the pie, The banking CEOs Thain, Lewis, and others represent just a small piece of the problem, true they must be held to accountability, however I believe we as a society are too quick to look for a scape goat, someone to blame (hell I do it too- there fair is fair im not a saint) someone to shovel all of our hurt and anger on- its really not fair to lay blame squarely on them.

Yes we need to regulate their bonuses and there should be a cap on salaries for now, and yes I agree the greed was ridiculous and still is, but lets also be fair and say that most of us in our society is consumed with greed to one extent or another so to simply lay blame to another person’s greed because its more obvious well…do the math does it add up? Math is factual and logical, did a small circle of men (about 5%) of our population really cause ALL of the issues we are facing now? Come on, people wise up WE ALL Screwed up- me included. Soo that’s my 2 cents.

Posted by BigM | Report as abusive

I respectfully disagree with the opinion that the US government should step aside, allow housing values to crash and find their clearing price. The housing and mortgage market is where this financial crisis started and where the end to this crisis must begin.

Homeownership in this country represents much more than just a financial consideration. Decades of studies have proven the many benefits of homeownership to society. As homeownership increases, everything from crime, to high school drop-out rates, to teenage pregnancies go down.

The vested interest homeownership provides in a neighborhood leads to greater community involvement from voting and tax paying, to activity with local government and school boards, all of which results in more vital and stable cities and towns.

Rather than let housing prices fall and find their clearing price, the feds should offer to buy up mortgages similar to the depression era program instituted by FDR. The US government should offer to buy from banks and institutional note holder’s mortgages in foreclosure. If necessary, add loans that are 90 or 120 days delinquent or have high LTV’s, or deteriorating credit and so on as needed with the sole purpose of abating the downward spiral of housing prices and restoring the availability of credit. Current appraised value minus 20% or 30% or a similar formula would not encourage reckless lending in the future often referred to as the moral hazard dilemma.

Craft a fair deal that most investors would seriously have to consider at this point. Since acceptance of the offer would be voluntary and not forced on the investor, concerns about damaging the appetite for mortgages in the secondary or securitization market down the road would be moot.

Mortgages purchased by the feds can then be directly renegotiated between the owner occupied borrower and a much more flexible Uncle Sam for terms of 3 or 5 or 7 years depending on the circumstances. If a temporarily modified loan still is not possible then a rental agreement to keep the houses occupied and off the market until price stability returns to home values would be pursued. When the markets return to a more historically normal price environment these properties can be refinanced or sold by Uncle Sam.

The taxpayer gets collateral in these properties which will eventually be worth even more than in today’s depressed market. The taxpayer’s community is less disrupted and more stable as fewer homes become vacant due to foreclosure or un-affordability. In addition, the taxpayer equity in their homes is preserved as foreclosure’s stop flooding an already oversupplied and distressed market and price stability is slowly restored.

As for the banks, this should stop a big portion of the hemorrhaging and help stabilize their balance sheets, and if not, nationalize the banks that need to be, clean them up and sell them off in a few years.

Bottom line is we do not live in a vacuum. What happens to our neighbors affects all of us and our worlds in many ways. If not for the humanitarian reasons alone, then for the fact that many of us have a vested interest in stopping housing value erosion for our own financial health government intervention makes sense.

This crisis was both foreseeable and preventable, growing out of control while the Bush administration was asleep at the switch for most of the last eight years. The fact is it was not the homeowners that created the exotic and sometimes dangerous mortgage programs. It was not the homeowner that approved any mortgage loans either.

It also was not the the homeowner that gobbled up this toxic garbage packaged as mortgage backed securities as quickly as it could be originated. And, it was not the homeowner that relied on credit default swaps that even the dumbest amongst should have recognized as nothing more than unregulated insurance that probably would not be worth the paper it was printed on if mortgages defaulted in any great numbers.

This housing crisis is not confined to sub-prime or those that simply bought too much house. Even homeowners with 800 plus credit scores, a decent down payment, savings and a stabile income history are often only an extended job loss or illness away from having to sell their home.

Goldman Sachs, Citi, BofA and AIG were given tons of money to stabilize their balance sheets and encourage lending, with little real success. It was said at the time that there were no options, that these entities were simply too big to be allowed to fail.

Having the US government get out of the way and let what is left of the US housing market crash especially in an economy that is shedding jobs at a panicked rate while the biggest banks teeter on insolvency, seems like the recipe for social upheaval and rioting in the streets.

The truth is it is the middle class, most of whom are homeowners in this country that should be considered too big to be allowed to fail.

Posted by Phillip Cornacchia | Report as abusive

A house is an investment and will give a solid return over the long run. Like any investment if you mismanage it, returns if any, will be poor.

For all the homeowner haters you are just jealous your landlord won’t let you paint the bedroom lime green.

Posted by Jack | Report as abusive

Refreshing to see someone writing an article that makes sense and also refreshing to see so many who are sharing thoughts similar to my own albeit, far different from what gets through in the media and out of the mouths of politians and other leaders. The housing market has been over-stimulated far too long by bogus means such as the ridiculous mortgage-interest tax deduction (see February 20th, 2009 8:59 am GMT – Posted by AtomikWeasel, who I thought must have read my mind since I’ve been expressing this idea for years).

But let’s take things a little further and talk about regulation of corporations, whose leaders have raked, plundered and bled dry the stockholders in the name of capitalism. After all, how can a publicly traded corporation be a capitalistic entity when the board and the executive leaders own less than 1% of the company. How sound can their decisons be as evidenced by the sizeable bonuses and parachutes regularly given corporate cronies? As an example, if you owned a company, would you fire your CEO and give them $68 million as they walked out the door for the last time(see Citi and “the Clown Prince”)? The government’s job is to protect and erect laws to protect the public from common thieves. Obama moved in the right direction in limited CEO pay for TARP recipients but he should continue in that vein. In a corporation with a fragmented ownership base and a controlling entity that has little ownership participation the government has right to make demands of such a company and put regulations on compensation and director pay. Isn’t it true the government has a vested interest in these companies through the 401k plan?

And what about job creation? 789 billion to create 3.5 millions jobs? Eliminate the H1 and L1 visas to create 2 million jobs with no cost but a memo to INS employees. I presented this idea to one colleague and he said impossible because Americans are too stupid to be able to produce the same quality of IT that India can produce….hmmmmmmmmmmm…

Posted by Louis | Report as abusive

I vote that the pundit involved really needs to tap into the paid down equity on his house for something – like college tuition for a child whose fund is now tapped out because the markets suck. Or maybe he should have a sudden medical expense. Or a relative has died and the house needs to be sold.

Or maybe he should get transferred or laid off – something related to no choice of his own.

Posted by Michael | Report as abusive

Great article James. Thanks for speaking your mind.

The current predicament started with the housing market, and IMO it will end with the housing market. If the government really wants to help the common man (and I hope that’s who they’re really trying to help) then why don’t they just make mortgages affordable? All this money pouring into financial firms, the Fed rate at 0.25% and we still have 5% 30 year mortgages! Bring those rates down to 1-2% (or less) and watch the investors/buyers come pouring back in. With the uptick in demand, the market will stabilize and people will stop walking away from their mortgages because they can see some light at the end of the tunnel.

Of course rates couldn’t be that low forever else we risk creating the same bubble as before, but in the short term it would definitely make a difference.

Posted by Dave | Report as abusive

I am not unside down on my loan. I did not ‘lie’ or buy out of my price range but I was outsourced (my job of 14 years to India). I acutually trained my replacements and I can factually say that my replacements spoke little or no English. Did not know accounting principles, or Mainframe processing. Period. I have a graduate degree. I worked in a sweat shop environment, was paid well. But we were available 24/7 for the company. If you think that any off shore company will provide that service, you are mistaken and so is your friend. the alarming rate that engineering and IT jobs are being shipped overseas is terrible. When did we stop taking care of our own first?

If I don’t find a job soon, I will either have to
1. Sell my house
2. Lease my house or
3. Lost my house

I resent that my old compnay is getting a tax cut for off shoring my job. I in no way participated in the greatest rip off of the housing market in this country’s history. And yes after paying taxes all my life, I need some help.

Posted by jo ann landers, florissant mo | Report as abusive

To February 20th, 2009 10:49 pm GMT – Posted by jo ann landers:

You are absolutely right about the atrocity of the outsourcing fiasco. And no doubt the Indian companies that are notorious for bribery and kickbacks had a hand in corrupting countless individuals here. The problem is they must have gotten to the politicians as well as the corporate insiders because no one is really talking about it or addressing the issue. Like I said before, we can create 2 million jobs here just by addressing the issues surrounding outsourcing and fraudulently acquired H1 and L1 visas. And the effort would hardly cost anything. The government and corporate leaders are perpetrating a ridiculous hoax on the American people and continue to get away with it. The politicians would rather mortgage our future for years to come than risk pissing off the corporate leaders that enrich their campaign coffers or otherwise. And the corporate leaders are just grabbing all they can because no one is minding the store. It’s all out of control. Lol…what should we expect when 95% of or politicians are lawyers…hmmmmmmmmmmm…the most professionally trained liars. Let’s wake up America and band together before there is nothing left.

One last note. The government can help you out now but if the root problems are not corrected then it will be like filling the leaking pool with water without fixing the leak. If they give you money to help you out now, what will you do when your money runs out, which it will.

Posted by Louis | Report as abusive

“Prices of housing in the U.S. were driven too high by too much leverage even as supply increased. Let’s accept that, allow prices to fall, the banks to fail and start again on a new stable footing.” ….. Well put. I would also add that it is time for the States to stop accepting federal money and work to reconstitute a new federal government that is lawful under the Constitution. Our federal government has grossly neglected their duty to perform up to their end of the bargain and remain within their boundaries set by the Constitution. It takes a Republican form of government to tie the hands of tyrants but the people must always remain vigilant to the job of keeping an ever watchful eye on the federal government. First we may want to put one foot on each side of the door, put our hands on our shoulders and pull with all our might until we can see light again and then proceed sending the feds to the unemployment lines! We can do better and we have to.

Posted by jason | Report as abusive

Excellent article.

A house is a place to lay your head, NOT an investment! Buying a home has always been a lousy investment, earning about 1% a year, when will people understand this?

I hear many troubled homeowners who claim the “by no fault of my own” argument. HOGWASH! You rushed into the decison, didn’t read the fine print, didn’t take time to think what would happen if you lost your jobs, or if that variable interest rate would go up, why it might not be a good idea to take out a home equity loan, etc.

I am an average American who knew he couldn’t afford at such astronomical prices, and we earn in excess of 150K a year. Realtors told us it was great time to buy, our friends told us it was a great time to buy, how well their “investments” were doing, our parents pressured us to get in before we were priced out, we were made to feel like lesser citizens because we chose to rent and didn’t own our piece of the “American Dream.” But we thought for ourselves, did the simple math, and concluded what anyone else should have for themselves. That it simply wasn’t affordable, and couldn’t last.

Now here we are, the bubble has burst and everyone is crying for help asking for handouts and claiming ignorance. I am told we are all in this together, no one wants to see their neighbor foreclose and all of our property values will go down. Well, I don’t own a property, I don’t care if my nieghbors home is boarded up, this is life, make a bad decision, live with the consequences.

It is people like me who will dig us out of this mess and clean up all the pieces. I am sitting on cash waiting to buy, but not at these levels! I’d rather rent forever, as the author states, its a MUCH better deal! Why isn’t the renter ever mentioned or considered in any of these talks of bailouts? We are the very people who will bring the economy out of this depression. WHAT ABOUT MY AMERICAN DREAM!!!!????

Right on!
and even then, note THAT IT”S THE RIGHT THING TO DO!! People, when you buy a house it is a RISK with your money and the banks money that you will be able to pay it off. If you lose the bet, I’m very sorry and sad to see it, but that’s the RISK YOU AGREED TO. That’s life. Because the only other alternative is to somehow penal;ize others to pay off your poor decision, And that’s certainly not right.
Here’s another way to think about it, If it WAS the right decision ( the market went up) and you made money, either through flipping or you just decided to retire and sell, whatever your situation, would you be sharing your gain with the public and / or government? OF COURSE NOT. YOU TOOK THE RISK, now face the consequences.

Don’t blame others, I am NOT in a house, because, quite frankly, I saw the irsk of being in a half million dollar mortgage (here in California that was cheap at the time) and I relized what insanity that was, especially if the market turned down.

Moreover, there IS money out there in the private sector, just at a much lower dollar figure. Credit markets are NOT “frozen” as the saying goes, the buyers are simply not going to pay these over inflated prices. Eventually the sellers WILL give in and price them so that the people will buy them again.

I didnt take the risk (of home ownership) so I could wait for a day when it was more reasonably priced. Let free markets prevail, we’ll all be better off in the long run.

Oh, by the way, the government can’t save you anyway, the current debt is so huge that even if they multiplied the bailout times 10, there would not be enough money to pay all the debt. It WILL fail whether we try to bail them out or not. Credit is on a CONTRACTING trend and there is no way to stop it. All the government is doing is getting us, the people more in debt, such that we as a country, will be unlikely to pay our debts (T-bonds, T-Bills, T-notes) and we will have to default. Can anyone say “ARGENTINA”, or any other South American country that has defaulted on its loans.

The game’s up and we should stop going into debt NOW and focus on retiring our debts instead.

Posted by tim | Report as abusive

“You probably have about two to three million homes that we overbuilt

If that’s true, there’s a simple solution — every house that is foreclosed should be bulldozed. In a few months, that should start correcting the market.

Posted by Bill T | Report as abusive

The portion of the bailout intended for homeowners should be paid for by removing the tax deduction for mortgage interest. Funds for bailing out brokerages should be repaid with a few-cents-per-share transaction transfer fee on stock.

Posted by Jim in Nevada | Report as abusive

Alright, then what? Imagine it is February, 2011. Housing has hit bottom and some of the banks are nationalized and recapitalized. The stage is set for a new real estate bubble because the underlying cause of the one we’re in now has not been addressed.

To believe the “experts,” our present disaster results from a combination of loose money policies by the Federal Reserve after September 11, 2001 and the practices of a cabal of predatory lenders. But I invite anyone and everyone to please check out the Case-Shiller housing index over the past twenty years. The bottom is just about 1997. Hmmm…what happened way back then?

Oh, yeah! In 1997, Congress enacted the Taxpayer Relief Act. Before 1997 one had to be 55 or older to receive a one-time capital gain exclusion of up to $125,000 for the sale of a primary residence. The Act changed everything. Now single taxpayers could exclude $250,000, $500,000 for married couples, of gain on a primary residence or second home. And here’s the good part: they could do it over and over and over and over and over again. Just live there for two of the previous five years. We all know people, perhaps ourselves, who bought a condo or single-family home, lived in it for 24 months then used the tax-free gain for the downpayment on a larger property. Why buy risky equities and pay 20% capital gain, 15% as of 2003, when Uncle Sam gives $500,000 profit tax-free? (And doesn’t real estate only go up? Remember that urban legend?) The choice was a slam-dunk and we Americans made it–by the millions.

To quantify the effect, Federal Reserve economist Hui Shan did a study of homeowners in 16 towns around Boston. Her conclusion was that in the category of homes with less than $500,000 appreciation, in the ten years after 1997 the legislation, by itself, caused a 17% increase in home sales. This perverse incentive is still on the books. An incentive that has sucked a disproportionate percentage of private investment into residential real estate; an incentive that during the boom decade made the job category “realtor” the most popular, and lucrative, part-time work in the country.

There is not political support to radically change or eliminate this legislation but I contend that there can be no new beginning, no real CHANGE, without one.

Posted by Lightning Rod | Report as abusive

Housing price is a bubble when people cannot afford it. If corporates pay their staff more, then the employees can afford their mortgage then it would not be a bubble. However in the last 20 years, HR expertise call paying staff more “inflationary”. Thus in a year with 3% real GDP growth and 2% inflation, workers only get an average raise of 2.5% or so. This is the average, some get even less due to pressure from offshoring. Only people high up in the food chain benefits from economy growth.
But banks keep on selling mortgages at inflated price to drive up consumption. The housing price is artifically driven upward not because of the value of the property itself but to leave a margin for people to spend on their credit cards.
Hence to think that leaving the housing market to correct itself is going to work seems to be a bit away from reality. It is like leaving a ponzi scheme to correct itself.

Posted by Lee Siu Hoi | Report as abusive

This is right on the mark, let the housing fall to the floor. The irresponsible will learn their lessons, and the markets will then recover. There are no free handouts, and no responsible person has to pay for the stupidity of others. Any other option is a total waste, just throwing good money after bad.

Posted by Thom | Report as abusive

The only reason home prices ever go up is because the money supply increases. More money chasing the same goods causes their price to go up. If the government stopped printing money in 1950, we would still be at those prices.

Posted by Gabor | Report as abusive

The definition of insanity is doing the same thing over and over expecting a different result. Having the government interfere in the market by supporting housing via artificially low interest rates for too long caused the problem. Continuing to interfere by doing the same and then going further by outright subsidizing certain loans is insane. The free market had nothing to do with getting us into this, the housing industry has manipulated our government. People who promote or buy into the fear that is being spread by the administration about the need for interference are letting the government push logic to the side just as the last administration did to achieve its agenda.

Posted by PatM | Report as abusive

In order to find a solution to the housing crisis, we have to separate homelessness from the term foreclosure.

Foreclosure is merely a remedy to a business transaction. It is used to clean up or find an equitable closure to a business deal gone bad. A house purchase with a mortgage has to go through this just like any other chattel that is not bought outright. Prevention in the use foreclosure as a remedy merely increase the settlement cost in both time and money.

Homelessness on the other hand is not a business transaction but a condition rooted in the soul of the nation. A family can go through foreclosure and not be homeless. A homeless family is just homeless.

To equate foreclosure with homelessness is misleading. Foreclosure is something one has to go through after a bad business decision. Homelessness is more complicated. It is something one falls into after some bad life decision. Both can be a good learning experience.

The best thing America can do is to look after its homeless because a nation is only as strong as its weakest citizen. The government should allow foreclosures but be ready with some safety net for those that are heading towards homelessness. This will cost far less and will help pinpoint areas in the housing industry that needs structural change.

Posted by Joseph Meneses | Report as abusive

agree with matt t.
claw back ill gotten gains from past executives BEFORE the govt risks us taxpayer money in an adventure even the regular “investors” don’t touch. we’ve see it too often, ebbers/wcom, lay/enron, henry,samuli/brcm, broad/aig,kbh, mozillo/contrywide, scrushy/hlsh, strauss/jdsu, kowolski/tyco, trump/trmp etc. bubbles were created, lobbyist bought off regulators to look the other way, ceo’s walk away with billions and the taxpayer/little guy gets the bill. the problem with the system is: crime DOES pay. we just accept the “from now on” corrective appeasement rather than claw back bounty from fraud. ask jailed petty thief if they would be willing to spend 5 years in jail (for their “white collar crime”) to keep hundreds of millions and the answer would be “what a deal”.

Posted by kj | Report as abusive

Allowing the free market to act as a free market is not what will cause a depression. The depression is coming anyway and nothing the federal government can do will stop it.

Irresponsibility is better defined as printing or borrowing trillions of dollars to pump into the financial system to prop up home values that were inflated as an unintended side effect of past printing or borrowing of trillions of dollars.

For the past 20 or 30 years the federal government, largely through the expansionist monetary policies of the Federal Reserve, has been bouncing us from one financial bubble to the next but the game has finally come to an end.

The United States and the world will now enter a prolonged depression that will bring market valuations and hard asset prices back to their means and there is nothing that the federal government can do to stop it. The most intelligent action that our government can take is to do nothing. Get out of the way and stop making it worse!

Posted by SocietyIsBroken | Report as abusive