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

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I agree with the essentials of your argument here. The difficulty is cultural and political. Consider the sacred deductibility of mortgage interest as well–it serves to artificially inflate home prices, fails to provide any net benefit to home purchasers or owners, is to the disadvantage of renters, and benefits only the real estate, banking, and insurance industries who drive the political dynamic by exploiting the dream of ‘ownging one’s own home’.
There is a benefit to attempting to maintain stability, however, in the process of unwinding the bubble, and that is worth a price. The question is what price.
Quite agreed as well that the principal beneficiaries will not be home owners but other invested interests.
Nice piece, thanks.

Posted by AtomikWeasel | Report as abusive

Back in the seventies I was one of literally a handful of students (there were 7 of us in my graduating class. I believe) who majored in economics. I think that all the go-go guys that ended up on Wall Street and in the mortgage business were the marketing majors and the accounting folks.

I’ve never understood the concept of a home as an “investment”. Not then and certainly not now.

Of course if one chooses to become a landlord or a property manager there is money to be made in real estate and commercial property is a different animal alltogether.

What about the mortgage deduction, you say? For middle income America, it’s an illusion. The standard deduction has increased so much over the years that the benefit of a mortgage is not as great as many people think.

I’ve always felt that a residential home was to be lived in. It is an asset, but so is a car or a boat and we certainly don’t look at our vehicles as “investments”. They depreciate. So does a house. Over the years homes need maintenance and repair. System (heat, hot water, AC, roof’s etc.) wear out and need replacement. We pay property taxes, insurance and we “improve” our homes, making them nicer to live in.

I’ve never understood the reasoning that any of these “improvements” was an “investment”. Sure, the people who want to sell you on the remodel always speak to the “payback”, but the payback is never close to the cost of the remodel. So there is never a profit in it. You may get enjoyment from the improvements, so called psychological benefits. That’s fine, but financial gain over the long term? I don’t think so.

You must replace your home if you sell it. If all the homes in the country are going up in value (OK that’s an oversimplification, but follow the argument) then any profit that you make on your home will be paid to someone else whan you purchase a new property. When you add in real estate commissions and the slew of fees that are attached to the sale of a home, I cannot see where the big gain is.

Actually, I think that a home is an expense.

At the end of life you can pass on your home to your heirs and they will surely benefit from it’s value. But you’ve paid dearly over many years for that asset that you’ve left them. The bigger the home, the more value you leave to your heirs, but the more you’ve paid over the years in taxes, maintenance, repairs, upgrades and utilities.

An investment….not for me. It’s a nice asset to have though and I’m sure glad that we live in a nice neighborhood. I’m willing to pay the price for that privledge.

Posted by Barton Poran | Report as abusive

Jimbo, can you please come up with a better solution than let them fail? This argument is getting a little warn out and will never ever happen. You sir would end up first in a government food line as bloggers will be the first to go. The rest of us will right behind you.

Posted by Matt T | Report as abusive

I fully agree with James Saft.
Every dollar spent to help sustain higher home prices works to repel potential buyers.
And let’s not forget that the US government doesn’t have that extra dollar to spend – It has to borrow or print it, or collect it in extra taxes.
Bad idea.

Posted by Y. R. | Report as abusive

And I would allow every American who has purchased a primary residence during the period this recent “real estate bubble” and has suffered decreased value on this primary residence to deduct an equal percentage of that capital loss from their income tax every year over a total period of 5 years until 100% of that loss has been deducted. The cash recovered from the USG could then be applied to the upside down amount of these mortgages helping to mitigate future risk of loss when these properties are sold.

Posted by RFL | Report as abusive

The truth is that we can throw billions if not trillions at a problem and have no solutions. This mess is an American individual mess and thus letting it restart is the best possibility. Let us fail, falter, and flop through this until we find our way out. As for the comment below, I take it you should tell that to the “comparable” lines of people lining up to afford a Blackberry Storm during Christmas despite the whole economic mess…food lines??? Don’t be so depressing.

Posted by JayG | Report as abusive

You are spot on Mr. Saft. The “American Dream” of home ownership is like a Hallmark holiday.

Posted by M Fargis | Report as abusive

I’m particularly struck by the comments of Barton Poran not only for their overall perspective and soundness but in particular for his observation as to the ranks of his graduating class having so few economics majors. So much of the process of investment and analysis is actually driven by sales sales sales. Think of a Jim Cramer, buffoon that he is, caricature as he is, as actually illustrative of the dominant process. It would be helpful if the present unfolding debacle brings some small measure of sound, sane analysis and judgement to the table. Not that that is by any means guaranteed. Still, one may hope.

Posted by AtomikWeasel | Report as abusive

Let’s face it people, a mortgage IS rent – only worse ! Why is this ? Because YOU have to pay all the repairs and expenses, and after 30 years you end up owning a dilapidated property that cost you twice it’s purchase price. And now, as proud new home owner, you’ll have to get a loan out to make all the necessary renovations (roof, plumbing, etc.)

We’ll leave you with the immortal words of Albert Einstein : ‘No matter how hard THEY try, no one can explain to me the miracle of compound interest’.

Posted by Gregg&Brian | Report as abusive

I totally agree we should let the housing go back to a natual equilbrium price rather than prop up the people that never could afford houses using a conventional 30 year fixed loan with some kind of downpayment. Once it goes back to an equibrium price, then normal people will be able to afford homes instead of these incredibily inflated prices that still do not reflect what the houses really were worth just a few years ago.

Plus I bitterly resent using my tax money to bailout those that had to know they couldn’t afford a house and the spectulators that droveup prices making it harder for normal people to afford homes. Only in America do we get rewarded for gaming the system instead of being responsible.

Posted by m smith | Report as abusive

Take from the residents of Hawaii who are totally used to the boom and bust real estate cycle that naturally plays itself out. It takes a decade or so to correct.

Why? Because the the owners of real estate cannot accept that their property has really lost value. Its called denial. They keep trying to sell at prices the market no longer supports. They do this until they give up trying to sell, are forced into a fire sale by necessity, or are foreclosed upon. In the meantime, the real estate agents keep misrepresenting the market price on the high side in order to get the listing.

Only when the properties that were bought in an earlier period for much less money start coming on the market at much lower prices is a market price reset. These sellers actually make a nominal profit on their houses since they bought at a much lower price than even the corrected market price. So they are thrilled. But when their actions reset the market price then the market finally reaches bottom. In Hawaii this has typically been 6 to 8 years from the top. I don’t think the U.S. can wait that long.

Top of the bubble to the next bubble has generally spanned about ten years. This has been repeating, more or less, for the last three decades.

Posted by Jonathan Cole | Report as abusive

It’s real simple. Tampering with any market in a free enterprise system is begging for the Law of Unintended Consequences to step in. “Genius” that he is, Tim Geithner may be able to explain compound interest, but he is not, nor is anyone, capable of “fixing” the housing market. It has to fix itself, and it will if we (Obama and company) just leave it the h— alone.

Posted by Larry Cumbie | Report as abusive

When I read articles like this and I realise just how insoluble the problems really are there can be no doubt that we are in the midst of THE Great Depression. The unfortunate events of 1929 will now take a backseat to 2009 and there is nothing that mankind can do about it.

Please resist th temptation to regale me with statistics in an attempt to demonstrate that the awful ingredients which marked the 1929 depression are not presnt in this one. There is no law that says that a depression must have certain prescribed hallmarks.

The sooner that we live up to the realities of this crisis the sooner we can start moving forward towards recovery

Posted by anton kleinschmidt | Report as abusive

BRAVO. James is right. The financial insanity of trying to protect 70 percent of foreclosures on properties not occupied by owners, borrowers who could not be found, or on borrowers who were defaulting again is absolute economic INSANITY. GREAT comments here, especially in homes NOT being an investment, as well as boom-and-bust in Hawaii. Let the market find its own bottom.

Posted by JJ Bean | Report as abusive

To follow up on my previous post, there is something that is really making me angry.

Why are global regulators allowing the short sellers, day traders, speculators, hedge funds, etc, to continue to make huge speculative profits at the expense of everyone else. Surely this is not helping.

The first step towards recovery is to curb their activities even if this exacerbates the crisis in the short term.

Posted by anton kleinschmidt | Report as abusive

Well done, Mr. Saft. We’ve been in a Depression for two years now and we’re in denial. Your suggestion, by way of admitting we have a problem which is the first step to a solution, is excellent. Markets are organic; that is, they are driven by people who are not consistent by nature. If we can admit that and get out of the way Markets if all kinds (Real Estate, Equities, etc) will naturally revalue themselves. And bring me the headsof Cable Television Illiterates. They know less than anybody.
Everybody should be reading Reuters and the Economist.

Posted by Andrew Franks | Report as abusive

How about lengthening repayment of loans to 75 or even 100 years to get monthly payments down to a level the borrower can tackle.

Posted by Henry | Report as abusive

I agree that the entire market needs to be allowed to fail. Autos, homes, everything is overpriced-inflated and undervalued.
I agree with Mr. Saft completely and with the comments that home ownership is a fallacy for an investment.
Even if you bought a home before the ‘boom’ and sold at a higher price…you still needed somewhere to live and either rented/assisted living or passed away and your heirs are selling the home (they have their own)you used whatever ‘profits’ came from the sale to live.

Your first sentence sums it all up beautifully. Too bad the academics and politicians just don’t get it. And yes, it is really still about bailing out the banks, not helping people. We rent by choice, and have been watching this whole fiasco develop over the past ten years from the front lines of the common folk, seeing people being seduced and deceived by real estate agents and mortgage bankers into a foolish financial decision. It was evident all along what the end result would be. Instead of bailing out investors in various securities, we should be letting people out of the loans and houses they can’t afford, and letting real estate values fall to an affordable level. Oh, and don’t let the real estate agents re-profit by getting a commission on foreclosure sales.

Posted by A. Gabriel | Report as abusive

I believe the ability to buy a home is important to MOST people. I’m tired of everyone making this problem out to be so complicated. It’s not! Simply put, people were made ABLE by unscrupulous lenders to purchase homes they simply weren’t qualified to buy…thus creating a RUNUP in home prices that could not be sustained. There is nothing wrong with making mortgages available to people who QUALIFY for them. The danger was in creating bogus lending practices, which made it possible for UNQUALIFIED people to buy homes they simply coudln’t afford. Therefore, the housing prices MUST continue to come down to a level that is REALISTICALLY AFFORDABLE to the borrower. I always wondered during the last 6 years, How on earth can so many people afford to be owning houses that were $600,000, have 2 new cars in the garage and the big plasma tv….well the answer was, THEY COULDN’T AFFORD IT…Let the bottom fall out and stop propping up a market that was never real to begin with. ENOUGH.

Posted by L Marceau | Report as abusive

First a technicality: “Of the 30 percent not in those categories must surely be quite a few of tomorrow’s re-defaulters!” The facts prior to that statement do not support that conclusion; your logic is flawed — please stick to facts, and solid logic; and not rhetoric, ideology, etc.

I’m still amazed how so much of the assistance is for banks, and not HOMEOWNERS!

I think the actual *facts* are both interesting, and useful. How about we do this, instead: (1) figure out the folks that are in houses, that got screwed by the greed of the banks, mortgage folks, etc., and (2) help them — the people, not the banks.

Then, for the banks, that over-leveraged, and the real estate speculators who bought houses trying to make a fortune, let all of the them fail, go bankrupt, etc. Let their greed be justly rewarded!

Posted by Tim Remple | Report as abusive

Disorderly resolution will lead to a depression that will result in economic and social change where fear embraces what is currently unthinkable. The suggestion of letting the markets unravel this mess is as irresponsible as allowing the markets to assess fair value during this bubble.

Posted by Craig Teuber | Report as abusive

Saft’s analysis is absolutely correct. The issue is the “morality of the market.” There are way more other factors effecting price than can possibly be dealt with with Obama’s mortgage payment giveaway proposal.

For instance non-qualified, subprime mortgage recipients have a tendency to lower the environmental quality of neighborhoods. Real estate wealth is ultimately environmental, so by keeping poor quality owners in marginal neighborhoods, you’re actually lowering the value of the real estate there. Sounds harsh, but that’s reality.

If I had my way, I’d speed up the foreclosure process, not delay it. Let’s get it over with and move on.

This is the most sensible commentary I have read in the last few days on the housing situtation. You can not fabricate a market, or create support that does not exist. You have to allow markets to come back into equilibrium through the unmanipulated recalibration of supply and demand. Interfering with this dynamic not only defers the problem, it has the effect of exacerbating it. Prices need to fall to where people’s standard of living makes buying a home under more prudential metrics a sensible decision. We can’t have it both ways America, eventually we are all forced to live within our means.
We need to be focused on things like growing real wages, manufacturing and our job base. I would much rather see my tax dollars applied towards the empowerment of consumption and real economic growth – not damage control on bad-decision-making. Some mistakes are painful, but those are the ones we dare not repeat!

Posted by T Michaud | Report as abusive

What you are suggesting is a complete failure of the financial system. This is what occurred during the “Great Depression”.

While there have been many mistakes in the more recent past like writing loans that could not possibly be repaid. It doesn’t take a rocket scientist to realize that a loan should not be given to someone when the payments will be larger than someones income. From what I am understanding about 5-10% of all home loans are in this category.

Personally, it might not be a bad idea for at least a greater scrutiny of lenders. This would come with at least a partial nationalization of the banking system.

Posted by Brian Bigelow | Report as abusive

Enough of your voodoo Reaganomics. This is the garbage that got us there in the first place. That deregulation would be a panacea for all that ails the economy and that somehow prosperity would trickle down. People bought that rubbish and what you see is what you got. Why don’t you guys admit it, the markets should have been regulated to weed out greed, fraud, and corruption. A free fall is not a plan!

Absolutely correct.

The situation will only get worse as the world economy contracts. As the US Dollar appreciates it is making their exports more expensive whilst at the same time the internal market collapses. This will lead to further and much higher unemployment.

These TARPS and other stimulus plans are a waste of time and money and will make things worse. The bond market will collapse. Expect the real hell to start from 2011.

Posted by D Rumsfeld | Report as abusive

Well said. My question is…why should the government help the homeowner? If a person wasn’t smart enough to look at the overall picture of how much money they earned and their monthly expenses and still get into a house they couldn’t afford, why should my tax dollars help them? It’s basic math. Our bank approved us for more than triple what we eventually spent on a house. They didn’t take into account our monthly expenses and what we owed at that time. If we had taken what was approved, why should I fault the bank if I couldn’t pay for something I knew I couldn’t really afford in the first place?

Posted by JK | Report as abusive

I agree completely with your point of view.
We need to have people and institutions to take responsabilities for their actions.

It is outrageous the fact that all taxpayers have to foot the bill for years to come for the irresponsible people who didn’t know better, and did not bother to learn and read contracts, and now want to live in homes they could not afford in the first place, or just walk out and leave the debt behind for the banks to write them off and consequently get bailed out by our money (taxpayer’s).

The same goes for the banks that wanted to make a quick buck on the expense of the stupid and illinformed.

M.H.

James. i appreciate reading your articles as i can see that you are looking at the issues and not trying to make a case for some vested interest group.

Government people , on the other hand, get together at cocktail parties and sip champagne etc with their associates that have vested interests in the direction that the market takes. Their policies are always primed to looking after their friends, if they can.

Bottom line is that the decimation of wealth in property and equity has resulted in a trillions of dollar financial black hole. It is a death spiral gathering intensity at this very second.

The UK is planning on increasing money supply through “QE” to boost inflation and thereby hoping to blow some new hot air into the asset deflation cycle. Accountants know that for every minus there is a plus, for every debit there is a credit. The BoE is about to bust England when instead it should be thinking rationally in terms of the economic and financial model that is curently in use. Thinking outside the box is good but for it to be effecrtive it needs to be in RELATION to the box. In terms of the BoE QE plan, they will buy up long dated Bonds using FICTICIOUS CASH and not money generated from the taxation of real economic activity. Bond holders will be receiving devalued paper or numbers in the financial computer system (QE)

Your perception of reality is correct, allow the markets to fall to their equilibrium, alow major financial institutions to go bust or take them over. Let the implosion finish and then there is a platform to begin anew.

This is a financial tsunami of historical proportions. Governments did not take warnings that were given earlier seriously and now it is peril. If i may venture into philosophy /religion here, i believe that sometimes the human race gets these cataclysmic events in order for some moral and spiritual awakening to take place.
In JM Keynes words ” in the long run, we are all dead”. Are we ready to face it?

Posted by Greg | Report as abusive

Finally, I’m reading something reasonable from you. Me and my wife saved a considerable amount of money during the past years. We realize that the real state market was crazy so we decided to live in a very small apartment, renting until see the solution. We did a lot of efforts during the past years. We didn’t spend in expensive cars, clothes, we have to go out to do the laundry, etc. It means to be responsible. Now, we are in a good conditions to buy a house even at cash. But all this solutions made us to change our mind and keep living in the same place. Why? Because we have been decided to buy a house at a reasonable price! That is the point! Do u think that I am going to buy a house just for 8K of tax reduction? Everybody knows that we can get more than that waiting and making a good deal.
I don’t understand. It’s capitalism or not?
Meanwhile, I keep funding irresponsible people.. and going out to do the laundry. My wife is gonna …..
Keep promoting the irresponsible behaviors!

Posted by Armando | Report as abusive

Enough said, let’s face it we are in a depression not a recession. Denial you bet we are in denial.

Owning a home may seem nice if you don’t have a mortgage.
Look at it this way, Your paying rent for 30 years to the bank and if all goes right. Maybe in a little less time, God willing.Your renting a home from the lender. You don’t own it until it’s paid for. Yes, by paying rent all you have is a receipt to show for it. But as a renter if there’s a problem, you call the landlord and he/she gets it repaired on their dime.

And finally on foreclosures. I’ve seen a home on a foreclosure list for 7,400.00. Talk about having your American Dream almost paid off. Down to the last 7k and your going to lose it all. Go into bankruptcy for 7k. It will cost that in legal fees. Give me a break.

Mr. Saft’s argument is obsurd. It is not based on econimics or reality. “let it fail.” Seriously? Check your figures. In America now and historically more Americans have more value in their home than savings in their savings account. Just because banks and financial institutions offered people mortgages they could not afford does not mean we should let the housing market fail. This is a problem and failure of banks and marketing. We should not continue to reward bankers and finaciers while ignoring the populace. Banks should be forced to correct faulty morgages – two ways, either write down the balance to where the buyer could actually afford AT THE TIME OF PURCHASE – not today. OR extend the payment from 30 to 40 or 50 years to get it down to what they can afford today. Let the buyer and the bank figure out what is best. If anyone is to fail here I say we sweep the bankers, brokers, mortgagers onto unemployment. They complain about living on 500k a year? Seriously????? let them live on unemployment benefits… the market will correct over time. It always has, just needs time to do it rather than all at once. Mr. Saft, your article borders on stupidity.

Posted by J. Gang | Report as abusive

The depressing part is that while James is right on, his commentary is hardly revolutionary or exceedingly brilliant. It is simple common sense to those who listened to their mothers.

Does anyone out there follow the end-of-the-world crowd which has been predicting 2012 for many years, long before the end was actually in sight? It’s a very interesting coincidence, if you believe in coincidences.

Posted by Russ in PA | Report as abusive

For the record, my government food line comment was meant to be ridiculous. Just like Jim’s writeup. Letting banks fail is instant 1929. FDIC CANNOT I repeat CANNOT handle the fallout.

90% or more of mortgages are current. A few years may change this, but many things will play out before then. I do not even pretend to understand all of them nor should anyone else.

Now, let start being creative. Enough with the bank failure is the only option. It’s the obvious option and uninspiring.

Lets set up a trade home program for one. I currently want to trade up in a home in a different city. Because I can not sell my home for anything but a huge loss, I have no current options.

Or lets claw back some of the ridiculous income made by the non-bank loan officers and realtors who made huge incomes. I know from experience many that eclipsed the US median income in a month!! Seize all property. Doable or not, this level of income is just insanity for those with little training and no personal risk.

Next, comes the “investors” watching too much of HomeTV’s Flippers. They should be taxed at 75% of their “earnings” retro to 2001 when this all started.

All are extreme, but as the saying desperate times…

Posted by Matt T. | Report as abusive

Right. So we spend trillions nationalising the banks and fall back on laissez faire economics to allow the housing market to self-right itself in isolation purely through the price mechanism . What a mess!

My fiance and I did by a house last year. However I was astonished and what we were pre-approved for! Were these people absolutely out of their minds. We are doing just fine now, but choose a house with a price tag of less than half what we were approved. If we had purchased a home at the top end of this figure we would have never been able to go anywhere or do anything including shower or eat, because it would have taken the majority of what we bring home to pay only the mortgage. Forget being able to make car payments, utilities or even grocery shop!

I think more people need to take personal responsibility for there actions. Shame on the greedy banks that made it possible. More shame on the irresponsible borrowers who were approved but could not realistically afford the payments. I do not pity people in this category who lose their home. Are they really surprised that is happening? I feel that this fiasco is simply payment for a deal with the devil. I understand that for many home ownership is a dream, but every dream can quickly becaome a nightmare.

Posted by Woman with Mortage | Report as abusive

Let’s face the facts here. Regulation of the mortgage/home building industry was abandoned by then President Bush because the tax revenue generated from that industry is what allowed waging war in Iraq while giving tax breaks to the richest citizens. Some, not those “flipping” their “invstments,” were buying homes out of fear that they could not afford to wait! If they did it appeared that they could never later afford a home.

Let the chips fall where they may now. Maybe the better course is to ban the consideration of a foreclosure in the credit history from cosideration in making future loans to those who had not bought more than one home in the last 7 years. Of course, the qualifications for that treatment should not reward high net worth “flippers.”

Posted by Thomas E. Shafovaloff | Report as abusive

[...] Let Housing find its clearing price [Reuters] Published Friday, February 20, 2009 1:26 PM [...]

Finally someone agrees we should not let obama start some kind of socialist government

Posted by chris | Report as abusive

Like everything else a solution is looked for that covers every base. That cannot be!

The Housing market must be sliced up into categories and each one addressed appropriately. Investment ownership, residential (live-in) ownership, speculative ownership all have their own solutions (none I can offer).

In essence, allowing the market to regulate itself is a good idea. Housing prices are way too high and need to balance themselves. Sure it will cause hardship across the board and sure it will seem unfair to folks who bought when house prices were higher, but that’s what free markets are all about.

Buying a house for living purposes requires much common sense and the affordability should be based on earnings and not “resell” value of the property. Sadly the home buyers were for the most part hoodwinked by the industry, the lenders and the Real Estate brokers alike. It was always a position of greed and profit and never one of concern for the buyers. The buyers themselves were also foolish enough to listen and accept the spiel. Blame goes all around and the results must unfortunately be shared by all around.
Homeowners who saw the value of their home increase and re-mortgaged their homes and thus had a sudden increase in spendable money are also to blame.

Should governments bail out..if the package guarantees that the banks and lenders lend again, then sure. But if they will not offer the guarantees, then no!

How to value homes is another problem, going back 6 years seems to be (for me locally) when the house prices started to spiral upwards, so a market valuation of prices at that time would seem a good start.
Then homes were fairly affordable in relationship to earnings and until such times as earnings once again rise, then present valued homes are beyond most peoples need.

Yes! let the housing market sort itself out. Let the lenders suffer.

But more fundamental approaches must include Distancing the retail banking from Real Estate Investment banking and Merchant Banking business again. These should never have been allowed to co-mingle again, the 1933/34 Acts was all about preventing another crash, Bush effectively allowed the banks to by-pass these ruling, and we are suffering the results.

Posted by John | Report as abusive

I find it humorous that several posters have trashed the idea of buying a home and laud the advantages of renting. They probably lease their cars as well (maybe even furniture? lol).
I don’t mind making repairs to my home, thank you very much; sure beats waiting around on someone else to do it for me! A little manual labor now and then is good for you. And when I do finally pay my house off, which will be in good condition because I’m not a lazy slob who doesn’t take care of things (rent or not), it will be mine and I will have a home to be proud of and I will have NO more mortgage payments! So rent on, suckers, I’ll keep my home and my mortgage.

Posted by Robert Smith | Report as abusive

Why does it cost $275 billion to rescue 5 million homeowners?

Posted by Mark | Report as abusive

I totally agree with this article. It’s like the government’s throwing MORE GASOLINE into an out-of-control wildfire. And it makes absolutely no sense.
As a nation, our minds have been so fixated on the “American Dream” – which is owning a home – that we’ve allowed irrational thinking, greed, IMPATIENCE, and DISHONESTY to outweigh reality and common sense; when it comes to knowing what we can really afford and staying within our means. As a nation, we’re far from “frugile”.

In the end, WE REAP WHAT WE SOW!

Posted by Marcus Jay | Report as abusive

Good article, many thruths in the comments too.

Technically, it is not the cost /i.e. intrestes/ of the loan the problem. It is the loan size. i.e. the house prices. So, yes, the house market will colapse, either with or without government help. A family, which can afford 110 000 loan principle, cannot repay 600 000 loan, no matter what is the interest or what is the duration. I see mortgages for 50 years, this is insane. Why somebody thinks that may help? To postpone ownership and hope on price appreciation, so be able to resell that house one day? Re-modeled loan payments – 50 instead of 30 years, 4% instead of 6% interest, the same EXTREMELY expensive home, which will be re-sellable in 40 years probably, if ever. This practice is just extending the house market pain.

So James is rigtht this time – finally :). I would just add that his conclusion is inevitable, not just a proposition.

Posted by Ananke | Report as abusive

Both you and Obama have it all wrong. You more so. The only way to rebuild our economy is to rejuvenate the housing market. There are so many ancillary facets of our economy tied to housing (tradesmen, suppliers, etc.), plus who wants to buy a car when you don’t know what your housing situation is. The solution is to renew the housing market in a way that will protect the lenders, help the current homeowners (in default or not), and create reasonable demand in this space.

We need to create a program that will allow people to borrow money for mortgages, regardless of credit, and deduct the payments from their paychecks like income taxes. Let people borrow or refinance at 4%, provided they agree to do this, and have a job. This will kickstart the economy far better than Obama’s plan or his stimulus package.

Posted by Steve | Report as abusive

Maybe the problem is there are far too many “financial experts” throwing there 2 cents around. Quit scaring people by putting out these theories that really don’t have any facts to back them up. The housing market is too big? People need places to live, what are they supposed to do? As for letting it fall on its face, what about those of us who paid a reasonable amount for our house 5 years ago? By doing that you would punish those who did the right thing.

Posted by Greg | Report as abusive

Sounds like a good deal to me. However, we have sold our home one year ago. We took a loss and we now live in a retirement community in a rental apartment. As houses continue to drop in price we feel we have made a good decision. We do have empathy for the millions who are going the foreclosure route. While many made a bad decision influenced by no down payment loans, and were out of their leauge in price and size of the house. The loan makers have purposely made loans they knew would never make it. They should somehow be made to pay for operating this legal but immoral make the sucker pay business.

Hey James Saft, you have a job @ the moment. I’ve lost my position after 16 years, lost medical coverage, paid my taxes and lived in my home for 50 years. My wife and I are raising a granddaughter of +4years of age. We have fallen behind in mortgage payments. We entered the 10% bracket, not by choice. I was just doing the right things and did not plan well enough for this disaster. I admit it, this was an oversight on my part. Perhaps you want to call me a COWARD or lazy like our newly appointed Attorney General?

Walk in our shoes and we can talk,
TurdSandwich

Posted by TurdSandwich | Report as abusive

I am afraid the post by Greg&Brian is absolutely wrong. We own over $1.5m in real estate and I can tell you that if you rent you will pay for the following: The mortgage on the property, taxes, repairs and yes my profit. That last item is something you may want to consider in the buy versus rent argument. Either way you will pay all the costs for the dwelling. If you rent long enough you will have paid for 2 or more properties. So it’s just matter of whether you want to pay for your own property or you want to pay for my property and also pay me for renting it to you. The bottom line is if you rent then you pay me more than it would cost you to own the property since I don’t rent it out of goodwill. Harsh but true, everyone that rents makes money for someone else…

So would we all be better off if 30% or more went back to being renters? Well for a lot of us that own rental property it would be.

Posted by David M | Report as abusive

this goes right back to your latest meet & greet mr. saft. its great you’re willing to let housing fall but not the banks that got greedy in the housing market? When banks weren’t qualifying income what were they doing. They said ok borrower your rate is 5.5% today. Oh but you can’t qualify your income? Not to worry we’ll just increase your rate to 6%, how’s that sound? Oh but you can’t qualify your assets? not a problem we’ll just move that up to 6.5%. Through that process banks found a way to make more interest. They single handily created real estate inflation by giving people loans that didn’t qualify thereby forcing everyone else that didn’t qualify to either exit the market or join in. If we now say its “jo-shmos” fault for taking a loan he knew couldn’t repay maybe we go right back to the bank and say you’re the responsible one here, you didn’t even verify this guys income yet you gave him $500,000? Poor lending practices led to the inflation we now see deflating, if we’re not going to let banks fall we can’t let housing fall. sorry.

Posted by Anthony | Report as abusive

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

[...] Let housing find its clearing price (Reuters) [...]

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

[...] News Hurting 100 million to save 9 million Responsible Home Buyers, Why Be Frugal? Let the invisible hand correct housing market Trapped in a home I can’t sell Deeply learned lessons from Japan Mortgage Plan Aids Liars [...]

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