Against a housing bailout: let the prices fall!
As homes remain vacant, yards get overgrown, windows get broken, and property values plummet. After all, it's not as if there are scads of responsible borrowers waiting in line to buy overpriced tract homes in suburbia. If subprime borrowers fail en masse, as they seem likely to do, property values will drop across the board, hurting the very people who are currently baying for the blood of failed borrowers. To put it more bluntly, self-righteousness is not a hedge against a failing economy.
First of all, there are plenty of people lining up to buy tract homes in suburbia -- just not overpriced ones. Let the damn prices fall and the buyers will come! Artificially supporting prices is just bad economics. When I hear people warning that allowing housing prices to reach equilibrium on their own will result in plummeting property values, I have to ask: is the widespread availability of affordable housing such a serious problem that we need to do everything in our power to prevent homes from being more affordable?I'll quote Carl Icahn's rebuttal to criticism that liquidations destroy jobs and ruin lives: "We're not blowing up the factories. The person who buys it should be able to make the asset more productive."
A similar argument applies to the prospect of people losing their homes to foreclosure. We hear about people "losing their homes" but isn't like the homes are lost -- they will end up with someone else living in them. The banks aren't going to take a torch to foreclosed properties. The homes will be sold at bargain basement prices. Some of them will end up in the hands of first time home buyers, and others will go to investors, increasing the rental supply and driving down rental rates. That's good for low-income people.
Bruce also suggests that if borrowers are given artificially low interest rates that allow them to keep their homes, they'll work hard to keep them in good shape. But I have to ask: are people who can barely afford their mortgage payments working 2 or 3 jobs really going to have the time or inclination to make the cover of Better Homes & Gardens?
We need to look at a housing bailout as a zero-sum game. Some people will be able to keep their homes, but others won't be able to get into the market. Speaking on CNBC, Larry Kudlow cited a statistic that 70% of subprime borrowers who are currently in foreclosure lied on their loan applications. Just so you know, that's mortgage fraud.
Given a choice between bailing those people out and giving a young family a chance to get into the housing market at a a good value, I'll choose the latter every time.