Keeping People in Their Homes

I am skeptical of plans to "keep people in their homes" by government action. First, I take issue that they were in any meaningful sense, theirs at all. In many cases, real estate was bought with little or no down payment. Sometimes interest only or negative amortization(the loan balance grows in the first years of the loan) and no equity was created for the "owner." Even when a more traditional payment structure was used, the first years of the loan accumulate very little equity in any case. The lender in many cases was always the full equity owner of the property, the "homeowner" was merely renting anyway.

Over the last year and a half, home prices have fallen nationwide and particular in California, parts of the Southwest, and South Florida. In Phoenix, the median home price is $150,000, while in recent years the median in Phoenix was $262,000. With these numbers, there is a huge percentage that have no equity in their home at all. Their option to walk away from the mortgage is valuable at this point. Due to a rising unemployment rate and many people already overextended on their mortgages people are unable or unwilling to make the payments and they are being foreclosed upon.

Inefficiencies and problems of foreclosure

1. Damage to property or poor maintenance due to an imminent forclosure (similar to an agency problem)
2. Transaction costs for selling a distressed property
3. Quickly changing neighborhoods and school systems.
   

Efficiencies of Foreclosure

1. By letting homes be foreclosed and prices fall, lets prices be set closer to where it makes economic sense, arguably
   
2. The homes won't go unused for too long. As long as prices are flexible, they will keep falling until someone buys the inventory. There are two sides to this. Someone is losing their home, but somebody else gains a home at a price compared to their income that is reasonable or an investor buys a property to rent to a "working American."

In many areas of the country, the multiple of home price to income was at astronomical levels. Even with prices down, in many places housing is still expensive relative to median incomes.

"After soaring during this decade's housing bubble, home prices recently fell back in line with what people earn -- and then kept falling." -- LA Times

Some people will benefit from this fall in prices and buy more housing.

Politicians and the media lament about falling home prices or rising gas prices. There is always a temptation to say that this price is too high or that price is too long. The response by some is "there ought to be a law." Surely, it does cause disruptions to some people, but for others they get much more affordable housing. Propping up the housing market prevents everyone from knowing what real estate is actually worth, blocking the signaling mechanism of a capitalist society.