Why the 'foreclosures are bad for everyone' argument is bogus


One of the most common arguments you hear in favor of foreclosure relief plans is the notion that foreclosures are bad for everyone because they lower the value of homes in the neighborhood. Your neighbor loses his house and all of a sudden yours is worth less, or so the theory goes. Secretary of Housing and Urban Development Shaun Donovan defended the housing bailout in part by saying that "Let's remember that every time there's a foreclosure, a next-door neighbor loses value in their house too... by stopping foreclosures, this benefits everyone."

There is some truth to that. But the problem with it is that it's only really relevant for people who were looking to sell their homes sometime soon. Ultimately the home is worth whatever it's worth, and a few foreclosures today will not impact your home's value five or ten years down the road.

So the whole "send your taxpayer money in to help your neighbor keep your property value from plunging" really only applies to people who want to sell sometime soon. And think about it: If it's in their best interests to use their money to bail out their neighbors, they have every right to do that! In fact, we could pass a new stimulus package providing generous tax credits to people who voluntarily pay their neighbors' mortgages. A win-win! I'm sure that many of these pro-stimulus package types would just line up to write checks.

By using taxpayer money to finance loan modifications and help "homeowners" with loan to value ratios as high as 149% (Aside: If you owe $300k on a $200k house, are you really a homeowner?), the federal government is actually pricing many young first-time home buyers out of the real estate market by keeping prices artificially inflated.

There might be good arguments for spending hundreds of billions of dollars in government cash to help people stay in their homes. I haven't heard any yet, but they might very well exist.. Either way, the argument that foreclosures hurt neighbors' home values is just not very compelling.