What is the real cure for the housing market?
As we begin part three of my rant on this subject, let’s go back to the basics, supply and demand. Prices are falling because we simply have more homes for sale either by choice or distress than we do “qualified” buyers to buy them. More importantly we need the right kind of buyers if we want to preserve neighborhoods and restore values. We need owner-occupant homebuyers, those that are going to buy a home to live in it. Those that will maintain and improve that home with pride. Both of those sub-topics were covered in depth in parts 1 & 2 of this article, so we will be moving forward from here.
The fact is that we have a lot more foreclosures yet to come and with the homes already on the market, there is no way that we can ever absorb this excess inventory in the near foreseeable future. Until that inventory is absorbed – there will be no recovery in the housing markets, foreclosures will continue to increase and more and more of our tax dollars will need to be spent bailing out the banks and these foreclosures.
We need about 5 million qualified buyers, preferably owner-occupant buyers to absorb the excess demand and start prices back on an upward trend. The question that keeps coming up is where do we find them? My answer is that they are already here right under our very noses!
All of those foreclosures on the market were in fact actually owned by someone before they became foreclosures! It is these folks that were previously foreclosed upon that we need to help become homeowners once again. After all – we already know that they would prefer to own a home of their own – that’s how this all started in the first place!
Since we know how many foreclosures there have been – we know how many people have been foreclosed upon. It is pretty simple really. Take these same people who were previously foreclosed upon and let them buy another house. Demand is back – home prices stabilize and start rising again. We get owner-occupants back in homes – neighborhoods get saved, people get to start building wealth and equity again. The economy gets a boost, etc. etc. How much more could any of us ask for? There is a very simple way to do this, and it can be done relatively inexpensively and relatively risk free and in the long run would not only restore the housing markets but would also save us poor taxpayers billions and billions of dollars in the process.
Why can’t we have a second chance loan? Yes a second chance loan for previous homeowners who got caught up and in some cases victimized by the real estate market. I am not talking about investors here. I have no sympathy for them. An investment is just that an investment – you put your money down and take your chances. Where there is potential reward there is also potential risk. Most of the so called investors were not really investors – they were speculators and it was amateur hour. Most of these investors could have easily avoided their losses if they had bothered to take an hour or so and read a book on real estate investing. In reality, many could have avoided losing hundreds of thousands of dollars simply by investing 25 cents in late charges at the local library.
Enough said about investors. It was they by their own ignorance and actions that helped overinflate the housing markets and forced many ordinary hardworking folks to have to overpay fortheir home. It is these folks that we need to address. They were not out to make a fast buck, they were not using their home as an ATM. Most just wanted a place to raise their kids and have a home that they could call their own. It is this group that got taken advantage of the most. It is only in this group that we can truly say that there may have been victims. But semantics and liberalism aside, we can work within this group to restore the housing markets.
We can do so in an almost risk free and inexpensive manner. We can create a second chance loan program that is not only self-supporting but completely self-funded as well. We have millions of Americans who have previously lost their homes and would desperately love to own one again. Most of these folks do have jobs and are capable of making affordable payments. With home prices and interest rates where they are now, most can easily afford a home similar to the one they had lost. We could start moving these families back into homes of their own, where they could begin building equity again and helping to stabilize and improve our neighborhoods as only owner-occupants do. Right now there are millions of these potential homeowners out there renting instead of owning. While renting, they obviously will not be spending money improving or renovating the homes they are in as they do not own them. Nor will the landlords be renovating or improving the homes either as there is simply no motivation for either of them to do so right now. If we want to see values come back up, neighborhoods preserved and improved, then we must create more homeowners and less landlords – it is that simple.
It has been nearly 4 years since the foreclosure crisis started and it is still continuing to worsen. Why after four years has nothing been done to stop this?
The solution is quite simple – a homeownership recovery program. Right now the government is spending billions keeping people in homes who are not even paying for them. Loan modifications do not work. Nor for that matter have any of the other government programs. In reality – most of the programs tried so far have actually made it worse. By keeping people in homes who are not making their payments but also know that they are going to lose the home eventually, we have created another problem. No maintenance on the homes, and no money being invested to improve them. We end up with continually degrading properties and no money being spent on home improvement that could be a huge stimulus to the economy. More so with no end to the housing crisis in sight and prices still falling, there is no reason for anyone to pay their mortgage on an asset that is still going down in value.
Our current failed policies have so far only contributed to continued decline in real estate values are the real problem now. We need a major shift in housing policy. One that will increase consumer demand (create buyers), and do so substantially so that prices start back on an upward trend.
Restoring home values solves so many problems. It creates wealth again which would then help stimulate our entire economy. It would reduce and in some cases eliminate major losses from the banks on foreclosures, and hence save us billions more in bailout dollars. Higher home values translate directly to lower losses for the banks and especially us as the taxpayers (Fannie Mae, Freddie Mac, & other bailouts) It would further reduce and possibly eliminate strategic defaults, as once people realize that their house will come back in value again they will not be so quick to walk away from it.
The Obama administration has repeatedly stated that they want to get out of the mortgage business and government guaranteed homes loans and have the private sector step in in the governments place. The trouble is that the private sector is not going to step into a broken market – if the government wants the private sector to take over then they need to fix the problems first.
Once the real estate market bottoms out and the worst is over, private money will come back into the lending arena as the risks and potential losses are greatly reduced. So why don’t we halt this downward cycle – decide that this is the bottom and turn it around – it can be done quite easily.
We have the means at our disposal, the system and structure is already in place, no new legislation would be needed and the program would be completely self-funded so not only would we as taxpayers not have to spend any additional money, but by saving the housing markets and restoring values – we as taxpayers could all save billions in future bailouts as well.
The Second Chance Loan could put millions of Americans back into homes, preserve neighborhoods, restore values, eliminate and greatly reduce future bailouts and best of all it won’t cost taxpayers a dime. In reality it might even show a profit and at the same time save us billions on more bailouts and subsidies in the future!
Stay tuned for Part 4 of this article, we will explain how the Second Chance Loan program could work.
Mike Krein
