Criminal defense in Austin Texas.

Who Benefits From Propping Up Home Prices?

Posted By on February 19, 2009

“Does it benefit anyone to force another family into foreclosure, out of their house, put another home on a housing inventory that is overburdened with excess supply?”

–Sheila Bair, FDIC Chair

Yes.  It does.

It benefits every single person who’s looking to buy a home.

It may also benefit the folks who’re getting foreclosed.

And it definitely benefits everybody else.

There’s this thing, called “supply and demand.”  When there’s too much of something, prices fall.  When prices fall, people buy more.  It’s how markets “clear.”  It’s how broken markets fix themselves.

When markets don’t clear, they remain broken.

In other words, when market prices are artificially propped up, transactions that otherwise would have occurred don’t happen, hurting everyone, and prolonging the problem.

In the US right now, 6.7% of all houses are vacant.  That’s 19 million homes.  That’s more than… ever.  At least since they started keeping track.

Why?  For the same reason there’s ever excess inventory in anything.  Because sellers aren’t willing to sell for prices buyers are willing to pay.

Every one of those houses represents an opportunity lost.  There is a family, somewhere, who’d like to live in each and every one of those homes.  19 million families, in fact.

But the sellers won’t sell them, because they can’t get the price they’d like.  So the homes remain vacant, depreciating while squirrels, squatters and looters and bad weather take their toll.

The process that drove houses to unsustainable levels in the first place is what caused the problem, and it process was driven by greedy, dishonest brokers and lenders, and speculators who got to play with free money.

It’s the process that caused the problem.  What’s happening now is the fix.

This plan will prolong the problem, while hurting those who had nothing to do with it.  In other words, if you’re looking for a house, this plan takes your tax dollars and uses them to make the house you’re looking to buy less affordable.

When housing prices fall to a level that approximates what they’re actually worth, houses will sell again.  But not until then.

In the meantime, let’s look at what causes foreclosure.  First of all, if the house is worth more than the amount of the loan – the amount that’s owed on it – there would be no foreclosure.  Instead, the owner would sell it.  He’d take the profit.  Or, at least avoid the hit to his credit.

If the house is worth less than the amount that’s owed, on the other hand, you have to wonder why an owner would even want it.

If the house is worth $250,000, and the debt is $350,000, it’s owner’s net is -$100,000.

This owner can become $100,000 richer simply by mailing the keys to the bank.

In other words, he’s better off after the foreclosure, than before.

Continuing to pay is a financial mistake.  (It may be the moral thing to do, but that’s a different issue.)

It’s like purchasing a car for $35,000, when the sticker price is $25,000.

When a business (rather than an individual) has a negative net worth, the owners liquidate the business, and the creditors lose out.  The chance that the business will fail is the chance that you take when you loan money to a business.

Anyway, the point is that keeping someone in a home that’s worth less than the mortgage is not necessarily doing him any favors.  In fact, it could be costing him a whole lot of money – especially if he’s going to wind up in foreclosure eventually anyway.

So if propping up home prices doesn’t help buyers, and may not help sellers (and why should the government favor one group over the other anyway?) who does it help?

The one group of people it definitely helps is the same group that caused the problem in the first place.



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