Question: What's the biggest reason for a bank to want to avoid foreclosure?
Answer: The cost and hassle of having to sell the home. Banks don't want to be realtors.
Question: Will a $7,000 tax credit to buyers of a foreclosed home encourage people to buy foreclosed homes instead of other homes?
Answer: Yes.
Question: Will having more buyers willing to look specifically at a foreclosed home reduce the cost to a bank of foreclosing on a person's home?
Answer: Yes.
Question: Then why is a $7,000 tax credit to buyers of foreclosed homes - a feature of the just-passed housing assistance bill - being sold as a "homeowner's assistance" bill? Won't it actually encourage banks to foreclose, and reduce their incentive to negotiate with homeowners who are in trouble?
Answer: ?
Friday, April 11, 2008
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2 comments:
The only thing that I can think (besides it being an election year) is this.
Why are so many homes being foreclosed? Because people are finding themselves #1 unable to pay their mortgage and #2 upside down on their home. The reason for two is because of supply and demand (since the supply >>> demand prices are dropping). If this $7,000 can increase demand then prices may start to stabilize (two big assumptions there) and people may have more incentive to stay in their homes and find a way to afford it or work with the bank to refinance.
Plus, since prices may have stabilized it could be easier to refinance since the bank is more likely to loan a higher amount against an asset that is not losing value.
A lot of assumptions but after all it is our government in an election year.
It's a reasonable argument, but the question remains: why only incentivize the buying of foreclosed homes? If the problem is national housing demand, then the solution needs to hit that broad market.
Reward the purchase of any home that is currently built or under construction (to avoid incentivizing the construction of new homes).
I agree that prices need to stabilize. I'm wary of any government program that tries to prop up prices because it's an unviable long-term solution (if prices are held artificially high, they still have to come down to clear the market). There's reason to try and slow the rate of descent, so prices don't plunge too far, only to rise sharply again.
But I think the government is simply trying, above all, to appear to be "doing something." What the economy really needs is the mounting weight of foreclosures to (1) hit banks whose elaborate mortgages are now backfiring, (2) encourage banks to negotiate with homeowners, and (3) provide a solid dose of reality to a market which was lacking it.
If the government always comes to the rescue, it not only means a load of debt for future generations, but it institutionalizes a lot of moral hazard. How many banks played fast and loose with the mortgage rules and terms, simply because they are "too big to fail" and they could count on government salvation?
Perhaps the worst part of the housing bust is that it comes early in an election year, drastically raising the odds that it will lead to some monumentally bad policy before November rolls around. At least there's seperate parties in control right now. I'd fear much worse boondogles if the Republicans held Congress (or Democrats the presidency), simply because there would be no effective dissent.
The dot-com bust injected a lot of much-needed reality back into the stock market. People who lost their shirts in that did not get a lot of government support to recoup their losses. I believe the same should be true in this situation.
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