Preventing foreclosures: Why bother?
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This post will likely find kindred spirits here: Slate economics columnist Daniel Gross (Yes, the same guy who wrote ‘Pop: Why Bubbles Are Great for the Economy’) argues that government efforts to stop foreclosures are ultimately bad for the economy.
Read the whole piece here, or trust me to summarize: After a bubble pops, the market goes through a rapid period of falling prices in which new values, and new prices, are determined. This is called ‘price discovery’ and it allows the market to return to normal behavior. The problem in housing, though, is that sellers, and the government, are trying to delay this day of reckoning.
’... desperate players in the market have taken a series of actions intended to delay price discovery in housing. Rather than cut prices, sellers began to throw in free cars or other inducements to buyers who paid the asking price. Brokers reduced their commissions. Builders started including all sorts of extras (fancy kitchens, pools, etc.) for no additional price. ... Such measures were like throwing sandbags at a rising river. And it hasn’t worked.’
He concludes, ‘In general, cleaning up quickly after popped bubbles is good for the economy, because it enables everybody to move on.’
One quibble before I let you weigh in: Gross argues that foreclosures speed price discovery because banks are much more likely to go out and quickly seek real prices. He writes, ‘It might take a solvent home-seller 18 months to mark down the price of his house by 20 percent. A bank will do it in 18 days.’ I’ll agree banks are quicker to face the music than your average individual seller. But they’re not that fast, and they’re not that eager to find a market price.
Oh, by the way, Gross acknowledges no one in a policy-making position will listen to economic logic like his: ‘I doubt there’s the political will to allow the fast price discovery allowed by foreclosures to continue.’
OK, I’m done. Comments? Thoughts? E-mail story tips to [email protected]
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