The housing/mortgage crisis

     Some say Obama’s plans will effectively force people who are being responsible, and paying their mortgages, to unfairly subsidize those who aren’t. And that government shouldn’t distort the market; that home prices should be allowed to fall to a “market clearing” level where they will sell.

     But, just as the market went too far on the upside, now it is overcorrecting (which it usually does); prices have actually fallen below sensible valuations. The market is not working properly because it is being swamped with too many properties on sale. And, as for unfairness, we won’t be bailing out the bad mortgages for their own sake, but because their situation is dragging everyone else down. You can see this not only in the value of your own home, but in your stock portfolio.

     The foreclosure situation is a terrible destroyer of societal wealth. It wouldn’t be a problem if foreclosed homes were simply sold to new buyers immediately. But the process is very cumbersome and slow, and this is obviously a poor market for selling any homes. Thus they sit vacant for long periods; are not maintained; are vandal magnets; and they become even less saleable. The blight degrades the worth of other homes in the neighborhood. Banks foreclosing on these mortgages are thereby destroying their own assets. If they had a grain of sense, they would already be doing, on their own initiative, the very thing that the government is now trying to make happen: writing down these loans and renegotiating their terms to keep homeowners in their homes. Mortgage loans based on bubble valuations contain a component that the banks will never recover, the losses have already occurred.

     Banks’ failure to face up to this and take appropriate action only aggravates the losses. Foreclosing willy-nilly on these mortgages destroys what value might actually still be left in them. And the banks compound it still further by making it hard for people to get new loans to buy the houses being foreclosed, contributing even more to the physical deterioration of these assets. But banks are big dumb inflexible institutions that operate by bureaucratic inertia.

     Unfortunately, the same descriptor applies to government. Does the government have the expertise and the personnel needed to actually do what it proposes to do with regard to these mortgages? I frankly doubt it.

     This is a tough situation for optimists. All I can say is, “this too shall pass.” The last century has given humankind a humongous improvement in quality of life. We are having a setback right now; but the big factors driving the larger improving trends are still there. Our children will be richer than we are. (A teaser: this will be explained fully in my next book.)

4 Responses to “The housing/mortgage crisis”

  1. jb Says:

    Yeah, this is a challenging time. As someone facing potential unemployment soon, it’s not pleasant. But listening to some people out there, you’d think that we’re literally witnessing the end of the modern civilized world – a permanent reduction of standard of living and health and everything else back to 19th century conditions.

    It’s frankly batshit insane to believe this kind of talk, and whenever I see people commenting about how apocalyptic the near future will be, I am now in the habit of following with an “*incredulous stare*” comment.

    This is a setback. Every great journey has some. As a society, we’ll learn some things from this, and move on. The only real danger to civilization and wealth is a Yellowstone eruption, or an asteroid strike. Everything else is just a pothole.

  2. Mike Says:

    Just passing by.Btw, you website have great content!

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