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The US Mortgage Crisis

The drop in housing demand and rise in inventories have put downward pressure on home prices. The national median existing home price was $210,200 in the November of 2007, down 3. 3% from the same period in 2006, according to the National Association of Realtors. The current large housing inventory overhang (10. 3 months of inventory at the current sales pace) will force further price corrections. Moreover, the recent large presence of real estate investors, speculators, and flippers will make a price decline more severe as expectations of falling home prices substantially reduce purchases by this class of buyers.

There are two channels though which deteriorating sub-prime mortgage credit quality will affect the housing market and home prices over the next couple of years. First, foreclosed property could increase the supply of housing by 500,000 units each year. In a market already experiencing excess inventory, this will put additional downward pressure on home prices. (The US Mortgage Crisis, 2008) Moreover, foreclosed homes typically sell at a discount relative to existing market prices.

This will further reduce home prices and exacerbate the credit problems of other borrowers wishing to refinance their resetting mortgage. (The US Mortgage Crisis, 2008) These borrowers moving into foreclosure

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will set in motion a self-reinforcing cycle which could spiral downward the housing market. The solution to this problem is the implementation of a fair and equitable adjustment. Foreclosed properties have extremely little value at auction. Nobody’s going to pay much money for a house when several identical houses on the same block are also up for sale.

Homeowners loses their homes, which is bad for them. And the banks, rather than being able to recoup the losses by taking over the properties, are left with a bunch of worthless houses, which is bad for them. This situation adversely affects the value of everyone else’s house in the area. And many of the foreclosed houses wind up left standing vacant, which is bad for the whole neighborhood. There’s no need for a quick rebalancing. In the long run, it’ll still all work out. You have X number of people and Y number of houses.

We’re not all going to go live in tents while the houses all stand vacant. Instead, a bunch of people will lose homes they couldn’t afford and a bunch of homes will lose a lot of value, and then people will buy cheaper houses. That’s a lot of inconvenient dislocation. And since we know the end state will involve more-or-less the same set of people living, in the aggregate, in more-or-less the same set of houses and making, in the aggregate, lower monthly mortgage payments we ought to be able to short-circuit some of the dislocation.

Have people stay in the houses they’re in right now. Adjust their monthly payments down to something they can afford, but that constitutes a better deal from the bank than what they’d be able to get by auctioning the property. That’s win-win for the homeowner and the bank, and provides stability to the neighbors. It would also serve, if done on a mass scale, the “price discovery” function that we need to tell which of our banks are insolvent and which are solvent, and thereby get the ones that turn out to be solvent to be liquid again.

What’s needed is the heavy hand of the state, either in the form of a new agency or else in the form of bankruptcy judges to compel banks to come to the table and work out non-foreclosure options for default loans. This will have the effect or reversing the cascade described above, and stabilizing the economy at a more realistic level. References Bater, J. (2008) “US Durables, Home Sales Dive In Aug; Claims Soar” Retrieved October 9th, 2008 from Metal Prices website: http://www. metalprices. com/metalNews. asp? id=78637&svc=ODJ&type=1

“Consumer Confidence Begins to Slide” (2008) Retrieved October 9th, 2008 from Gallop Daily Poll website: http://www. gallup. com/poll/110452/Gallup-Daily-Consumer-Confidence-Begins-Slide. aspx Pitzke, Mark (2008). “The World as We Know it is Going Down” Retrieved October 9th, 2008 from Spiegel Online International website: http://www. spiegel. de/international/business/0,1518,578944,00. html Sachs, J. (2008) “How to Fix the US financial Crisis” Scientific American, December, 2008. “The U. S. Mortgage Crisis” (2008) Credit Union National Association Policy Analysis Division January 31, 2008

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