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03/01/2009

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Anonymous

"What is true is that the avalanche of foreclosures may be depressing the price of housing below its long-run equilibrium..."


What do you expect? When you drop a bomb it usually leaves a hole in the ground and it takes awhile to sort through the mess.


Nobody knows where equilibrium is, especially as incomes and employment change so rapidly. Let's just stop the re-inflation process and reconcile our problem the right way. If that means low prices for some time, great, there will be plenty of investors coming back to the market for a deal. Affordability may even increase home ownership %... and it might be sustainable this time...!

Joe

A lot of people made a lot of really bad decisions in the leadup to this mess. I don't know that this type of plan is really going to correct that. I'm glad an effort is being made, but it still feels like we're putting a band-aid over an infection and expecting that to be effective relief.

Jim

I was having a hard time trying to find if I was eligible with the sketchy info.

I finally found this site which had a calculator and told me what I could be eligible for here:

www.homeaffordplan.com

Michael

I know I'm illiterate and uninformed paranoic, I'll just tell you what I think. Also I'm not American making me even less informed. My answer is based on what I see locally. The real question is "Where is the money?" And if we look at construction companies that have strong lobby. Houses were sold for price much higher than the real price of construction. As one needs lots of permissions to build and obtaining such permissions requires sufficient "influence" in relevant structures. So there was no real competition in construction dues to small number of companies and huge entry barrier. This way the housing cost was connected to people's expectations about the rise of the prices and not the real cost of construction. If these companies did not have such a strong lobby government could find violations and possibly confiscate the very companies.

Bring prices of land to what it is really worth and prices of construction to what it is really worth and the problem is 50% solved.

Now about people in debt. My grandparents my parents to never spend money you do not have. And my grandparents heard the same from their ancestors as well. Perhaps when asked about people now in debt they would say "let them rot". However there are many obvious negative externalities in homeless people. And you must be humane as well cause it is 21st century, not 19th. And adding insult to injury American government spends even more money it does not have.

Sorry again for my illiteracy.

Kevin Parcell

It seems to me that we can purchase the surplus housing and so define a bottom on the housing market and begin the economic turnaround now. I have details at this site:

http://twomillionhomes.net

If the "Making Home Affordable" programs succeed in helping everyone they're aimed at, then we're still two million homes beyond a healthy 3-4 month supply. In fact, while inventory dropped last year, month's supply skyrocketed.

Kevin Parcell

Jack

Michael; Part of the answer to your question:

"Bring prices of land to what it is really worth and prices of construction to what it is really worth and the problem is 50% solved."

........... is Perot's adage that "the devil is in the details".

Residential construction here in the US is largely a 10% gross margin biz, though I'm sure that during the bubble there were lots of 20% deals, perhaps more. Wealthy builders make it on big volume and with big volume comes much of the same risk we see in the stock market....... ie a region goes soft or there are down years etc.

Land prices? Just now I'm in OK where land is plentiful and prices did not spike and the price of lots are primarily development costs, a thin profit margin and perhaps $30k an acre for the farmer who owned the land for several generations. LA? SF? How to assess what a building lot is "worth?" Even now prime beach areas or upscale areas close to the cities and big jobs are not the problem; they are "worth" what competing millionaires bid for them.


Obviously "the bubble" caused ho-hum real estate to greatly overshoot the ever elusive "equilibrium" that economists claim a free market will approach; but who could know that at the time? Most buyers could only see that prices were soaring and even if their goal was no more than housing their family they'd better get on board sooner rather than later.

In any case R/E prices ARE normalizing, but! with large mortgages against them, the falling prices are hardly solving many of the problems.

Your GP's were wise in a way and probably lived a peaceful but, economically, a fairly humble existence. Look around, most of our great fortunes were made by those who believed in an idea and by one means or another borrowed gobs of capital to make it happen. McD's? Starbucks? Walmart? our industrial base? and so on.

As for lamenting the US "spending money now", I'd suggest a better question is that of running huge deficits over the last 8 years in a era of relative normalcy. Even $200 billion/year for the last 5 years of Iraq is not an insurmountable number to have mostly been paid as we went.

But perhaps the lackluster performance of the US economy, despite $300 billion plus deficits, is symptomatic of deeper problems? Was the Bush admin advised that the US economy is not sustainable unless we run huge deficits and reward the wealthy and our corporations with generous tax breaks? (I'd disagree!)

As for spending now........... I doubt you can find many non-Keynesian economists who'd favor tightening federal and state spending to "balance the budget" as a top priority just now.

BTW where are you living? I've a feeling that what is here will be coming to a theater near you soon.

StatsGuy


Posner admirably raises the issue of transaction costs - too bad Paulson didn't think of this in September, or Geithner in January.

Even if we had a perfectly efficient, rational solution that was mathematically elegant, the sheer time and cost of renegotiating all of these contracts (through bankruptcy, threat of bankruptcy, or some other mechanism) is astounding. The utter and complete failure of the HOPE program demonstrated this.

Obama's initiative makes some improvement in providing incentives to intermediate actors, but as a whole the program is a drop in the bucket.

It also does not make provisions for this crisis intensifying - which will almost certainly happen as governments remain behind the curve and continue to apply half-measures while hoping for the best.

Obama's program is far too smart and too small.

Let's keep the sophisticated programs for environmental and energy policy.

This is a financial crisis - bigger and dumber is better.

Tom

Here are two ways to diminish the foreclosure problem.

First, require banks who accept bailout money to forego deficiency judgments in foreclosure actions. The justification for this is that both the borrower and the lender either misjudged the market or corruptly or negligently overestimated property values. Neither should profit from this as they would if they were bailed out by those of us who didn’t get involved in such loans. Both should share the pain of their decisions: the borrower by forfeiting the down payment; the lender by sustaining the loss of the decline in property value.

Here is the beneficial effect of this proposal. The borrower could give the property back to the lender and the lender or lenders would have to decide quickly what to do: negotiate a new loan with the borrower or sell the property to someone else. Property values would find a market based equilibrium. This would happen fast. Once this happens, we will be able to see what loans were bad, what the losses are, and how much bailout money is required for the institutions that made the bad loans.

Second, the state foreclosure courts on their own should ensure that the lenders filing foreclosure actions in their courts actually know the result that they want. Currently, the lawyers filing foreclosure actions lack the authority to settle cases. They cannot even discuss settlement proposals. The borrower has to submit a loan modification package to the lender directly (bypassing the lender’s own lawyers) and has to continue going to court on the foreclosure case because the lawyer cannot issue a decision on whether the request will be granted. Enormous delays and waste of time by Judges and lawyers alike occur.

The courts have the inherent power to control their calendars. They could require someone from the lender with authority to negotiate settlements to attend pre-trial conferences set by the court if the lenders are unwilling to instruct their own lawyers about their settlement guidelines. A failure to participate in good faith in a pre-trial conference to settle the case should be punishable by a dismissal of the case with prejudice or with an award of costs and fees to the borrower. This would allow the speedier disposition of cases that are currently in the courts.

These two ideas will not solve the entire problem. But the first will cause a market-based adjustment to property values. Absent a market-based adjustment, the scope of the problem will be concealed. Concealment of the scope of the problem will prevent a lasting, efficient solution. The second idea will prevent the current overcrowding of the courts by lenders who don’t know what they are doing.

despiste

Posner writes:

"What is true is that the avalanche of foreclosures may be depressing the price of housing below its long-run equilibrium".

I think this means that the housing "bubble" was above the long-term equilibrium, so housing prices *had* to come down by a certain amount, but that prices may have fallen by an excessive amount. In this case, a foreclosure prevention program might lead us upwards *towards* a sustainable market level.


On the other hand, if prices are still somewhere between bubble level and equilibrium, doesn't a foreclosure prevention program prop up the bubble prices and prevent the market from finding a bottom on which to build? Couldn't a foreclosure prevent program lead us *away* from a sustainable market level?


What evidence is there that housing price are above or below long-term equilibrium?

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There is no way to be sure that housing prices are above or below equilibrium. It is a completely subjective field and any result, in my opinion, can be attributed to randomness.

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