Here's what might actually work……..
Let's have the government do something to fix the housing market. Ideas are flying around Washington. They include tax credits and cheaper mortgages for home buyers as well as leaning on lenders to rewrite mortgage terms for struggling borrowers. But maybe we should ask what, exactly, fixing the housing market means--and prepares ourselves for the limits of what these policies can actually accomplish.
Congress passed a bill last July to help the housing market; in an effort to churn demand and stabilize home prices, the bill created a $7,500 tax break for first-time home buyers. It also created a program to stop foreclosures. Bottom line: only 25 loans have been rewritten. In December, houses sold for 15% less than they did a year earlier. Says Wellesley College economist Karl Case: "Let's not delude ourselves into thinking we're driving a speedboat when we're driving a tanker."
Most proposals on the table are designed to boost demand without distorting the market and at the same time restrain supply by keeping people in their homes. The core issue is that there aren't enough people buying houses. Usually when price goes down, demand rises, but in the housing market, falling values make potential buyers fearful, sending them to the sidelines as they wait to see how much cheaper homes will get. If we could restore buyers to the market, the thinking goes, prices would stabilize, delinquent borrowers could sell instead of falling into foreclosure which is undeniably hard to stop, and the value of the mortgage-related securities contaminating our financial system would stop being such a mystery.
Ideas aimed at kick-starting this process include giving everyone who buys a house a tax credit worth 10% of the purchase price and driving down mortgage rates--perhaps to as low as 4%. Nearly one-fifth of all borrowers owe more than their house is worth. At the same time, some houses are still overvalued. Economists disagree by how much, and the answer changes from region to region. Houses in Cleveland are undoubtedly cheap. They could use some new home buyers there. In some ways, proposals to stimulate the housing market aren't really aimed at bringing in new buyers. Extending tax credits to people selling one home to buy another and letting homeowners use cheap mortgages to refinance won't get rid of excess housing inventory. These policies are meant to do something else: stimulate the economy by delivering money to homeowners. The other core issue is that too many people can no longer afford their mortgage. Maybe they took out an adjustable-rate loan that has reset higher, or they lost a job in the slowing economy. If we could stop the cycle of defaults and foreclosures, the thinking goes, we could prevent deeply discounted, bank-sold homes from flooding the market, keep losses from further impairing mortgage-backed securities and preserve property values. That's how we wind up with ideas like paying mortgage servicers to make loans more affordable and changing the bankruptcy code to allow judges to reduce the amount borrowers owe their mortgage company.
"We need to recognize the goal is not to keep everyone in their houses for as long as possible," says Edward Glaeser, professor of economics at Harvard University.
But there are also plenty of people who might be able to keep their homes with a lower interest rate or a longer loan period. "Servicers don't have the right incentives," says Christopher Mayer, professor of real estate at Columbia University's Business School. Cutting them a check in return for a modification of the loan, or trumpeting their legal authority to do so, is meant to prime the mortgage-rewriting pump, as is letting bankruptcy judges revise mortgages. Part of what drives up the redefault rate, though, are changes that don't lower, or may even increase, a borrower's monthly payments. A targeted tool like loan modification is probably a more useful allocation of resources than a blanket policy like cheaper mortgages. Make Some Owners Renters
Yet no policy can change the fact that both property prices and home-ownership rates went off the charts.
Neil
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