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    March 09, 2009

    Wise ... or crazy idea to solve the housing problem?

    Posted by: Andoni

    AA burn house

    In what I took as a joke, my financial adviser suggested the other day, that the answer to the current housing mess is for the government to buy up all the foreclosed houses......... and then burn them down. Fewer houses, higher prices.

    Would this work and if yes, how evil is it?

    Most people would agree that falling housing prices is at the heart of our current economic crisis. When housing prices were going up, people used those rising prices like ATM machines, taking the money from the increased value of their house and spending on just about anything they wanted. Right or wrong, real wealth or fake wealth, they were spending money and that kept the economy purring.

    Now housing prices are crashing. The ATM machines are out of money. People aren't spending, businesses are hurting -- laying people off, and the economy is tanking. On top of this, falling housing prices have caused the mortgages held by our biggest banks and insurance companies to become toxic assets and as a result the entire financial system is teetering on collapse.

    If only housing prices could change course and increase in value a little bit, things would markedly improve. I'm not advocating that prices rapidly rise to the bubble levels. However, just a little increase would help a lot...  and that would begin a major turn around for the economy.

    President Obama's $75 billion housing plan focuses on keeping the people who are about to lose their house or cannot afford their mortgage any more to refinance and remain in their house. It does nothing to take the 2 million houses that are already foreclosed off the market. However, it does prevent another 9 million houses from joining those 2 million. Eleven million houses on the foreclosure market would result in an unprecedented housing collapse. Obama's idea is to keep more houses from going into foreclosure, thereby hopefully putting a floor under the price of houses. This floor will not result in higher housing prices anytime soon, which is what we really need at this point. Under Obama's plan that won't happen until demand starts outstripping supply, and we don't know when that will be.

    The plan in paragraph one, decreases supply, and would have an immediate effect beginning to increase housing prices.

    The median price of a US home is about $200,000, but at foreclosure the banks are are lucky to get 50% of that and in many areas only 25%. In the Detroit area, foreclosed houses are selling for $1. How many foreclosed homes can the government buy if they decided to put another $75 billion into a plan to buy foreclosed houses and "burn them down?"  They could easily take about one million houses off the market with this amount of money, causing the average price of a house to rise, thereby taking the pressure off our financial institutions holding toxic loans.

    Can the government actually institute a program to burn houses down? I don't really think so. Burning down a house that a family used to live in would be politically impossible. Can you imagine the public outcry of such a scene on TV when the former family has no place to live?

    Secondly, the minute the government starting buying these homes on a grand scale, winning bids at auction would begin to rise because everyone would know that the government is in there bidding now. But isn't that exactly what we're trying to achieve - higher home prices? So the government could actually stop entering the market when it is clear that housing prices are on the rise. This could actually happen before they buy up a million homes.

    Certainly burning a foreclosed house down to decrease supply wouldn't fly politically. But what if the government bought these house and then sold them for scrap?

    How crazy an idea is this?



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    1. Tim on Mar 9, 2009 12:18:59 PM:

      or you could just wait for prices to fall, normal families could buy homes, rich people could buy investment properties and your wouldn't be burning down perfectly good homes...

    1. Tim C on Mar 10, 2009 8:50:25 AM:

      Tim, exactly. An economist I was listening to the other day said we need to quit looking at the recession as a disease and start thinking of it as a cure. A cure to an overblown, unstable financial system; a cure to housing costs spiraling up beyond the means of most buyers. Why is the government worrying so much about propping up inflated housing prices that were set in a bubble? Just because you put yourself in hock up to your neck to spend a $million on a house doesn't mean you own a $million house. You own a house worth what someone else is willing to pay for it. All bubbles burst. It's an economic fact as well as a physical one. Where I live, over the past several years, the housing market was in a frenzy, fueled by the markets looking for greater and greater returns, bundling together odd financial instruments, derivatives of derivatives, and then pretending they had value, and by prospective buyers willingly being blind the fact that you rarely get something for nothing. Eventually it all burns out. The recession is the fever breaking and like most fevers breaking, the patient is going to for a while feel like a truck hit him.

    1. Double T on Mar 11, 2009 1:04:37 AM:

      Tim C. who was the economist?

    1. Tim C on Mar 11, 2009 4:18:34 PM:

      Double T: I don't remember, but I'm pretty sure I heard it on "This American Life" on NPR in the last 45 days or so.

    1. Tim C on Mar 11, 2009 4:38:00 PM:

      Double T: Check the Jan. 30 show, The New Boss. It has an economics update at the end.

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