You Want To Save The Housing Market? Don’t Fight Foreclosures

One of my readers pointed me towards a Time Magazine article that argues in favor of speeding up foreclosures, as it’s the only way to truly stabilize the housing market.

From Time Magazine:

Slowing foreclosure rates by cutting the monthly interest rates of homeowners who could not otherwise afford their mortgages may actually string out the amount of time it takes for housing prices to reach a nadir and swing up again. A homeowner with a $300,000 mortgage on a house which is worth only $200,000 will keep that house off the market if at all possible, to avoid having to come up with $100,000 to subsidize a sale. That house sits in limbo while the government makes the monthly mortgage payment low enough to keep it in the hands of its owner. Excess home inventory growth is artificially arrested because residences which would normally be for sale are kept off the market.

It seems especially cruel to push foreclosures because no one wants people to lose their homes. But, at some point, the system must take into account the fact that many of these people cannot afford their houses. The irony of allowing current owners to stay where they are is that they will never really “own” a home. They will remain in houses where they are very unlikely to be able to pay off the principle. These residences will not be released into a market where prices continue to drop very rapidly because there are no government programs to keep the housing prices at or near current levels as people are pushed out of work. If enough people lose homes, some of them will at least have the opportunity to buy property that they can afford, property which has reached its economically “correct” level through the forces of the market and not through a system that manages prices.

This relates to something I said earlier in the week, with respect to the mortgage rescue, loan modification programs, government policy, etc, needing to differentiate between those who are just in situations they could never afford vs. people in affordable situations who have just fallen on hard times due to loss of income, medical expenses, divorce, etc. The reason for this is that if we are indeed going to put taxpayer money towards helping homeowners, let’s focus on the cream of the crop AKA the people who just need temporary help to get back into a sustainable housing situation.

It doesn’t make sense to artificially enable someone to stay in a home they can’t afford, because chances are all you’re doing is both delaying the inevitable for that person as well as the future stabilization of the housing market. In my view the cost of delay tactics is far greater than the cost of the short-term pain caused by allowing certain things to run their course.

Finally I think that people need to accept some harsh truths about the housing market:

Market Correction: the housing market is going through a very needed price correction after a period of inflation caused by over speculation, irresponsible lending and irresponsible borrowing. The only way for the housing market to stabilize is for it to give up those gains. Now this is a hard pill for many to swallow, but trying to artificially prevent reality will only make things worse.

The only way to fix housing is to allow the market correction to run is course.

Affordability: outside of those who are struggling due to income loss, many of the people facing foreclosure as those who used exotic loans to spend above their means. For evidence of this look at mortgage default rates and note how the default rate for prime, fixed rate mortgages only shows a slight increase, while the default rates for exotic mortgages is skyrocketing. The only way to help someone stay in a home they can’t afford is to directly subsidize their mortgage until its paid off. Call me crazy but I don’t think that’s sound public policy or a good use of taxpayer dollars.

The focus shouldn’t be to help these people stay in their homes it should be put them into a housing situation they can truly afford, whether that’s a rental situation or helping them buy a cheaper house.

Long-term price outlook: driven by largely by speculators many homebuilders built condos and single family houses that were traded between speculators like shares of stock, the problem is that there was never really demand from an actual future resident for these homes. As a result prices will continue to be driven down until all of these excess housing units can be absorbed by the market.

Needless to say the inventory issue is likely to negatively impact housing prices well into the next decade if not into the 2020s, and many people may never see the prices of their homes recover.

Moving forward I think this nation needs to decide if we’re going to accept the housing market as it actually is, or try to artificially force it to behave as we’d like it to be. The longer we deny the former the greater the pain, and the longer it’s going to take for the market to recover.

Final thought: how is living in a home you can’t afford (especially if you’re in a negative equity situation) any different from renting, when you need a government subsidy to make the mortgage? In fact doesn’t that make you a modern day serf since you’re basically just a renter that is enslaved to the home they live in, because you can’t afford to leave the home if you want/need to.

I think we also need to rethink what ownership actually means, because once you can’t afford the home on your own and/or can’t afford to leave you don’t own the home the home owns you.

You can read the article in full here.

Source:

Time Magazine : “Saving the Housing Market by Speeding Up Foreclosures” — Douglas A. McIntyre, February 18, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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