The fear of foreclosures and falling home prices is often an irrational fear. Obviously, the person losing his home may be fearful. Also, neighbors who wish to sell their own homes are nervous about low prices. However, most people have not budgeted around the notion of refinancing. Most people plan to stay in their homes for (say) another four years or more. For this vast majority there is no reason to fear foreclosures.
The government announced a plan to lower foreclosures. They will use $75 billion of tax money for this. Supposedly redistributing our money to other people is in our self-interest! Here’s how Obama tries to convince us of this: “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone”.
Banks do not want to sell homes. It is expensive. It makes sense for lenders to re-negotiate new terms if they think the home-owner can meet those lower terms. However, if the borrower cannot meet those lower terms, he is in the wrong house. Foreclosures are a temporary situation. They come from recognition of reality: the reality that — with the assumptions of today — the home-owner cannot pay his debt. The quickest way to fix the problem is to foreclose. Home prices will drop, and then they will rise again. A few years hence, prices would have reached a level that makes sense under new assumptions, and the wound will have healed.(1)
Keeping people in homes they cannot afford simply pushes the problem out to the future.
Very few of my middle-class neighbors got carried away by the housing boom. Even the few who did are basically responsible folk who made this one large mistake. Most of them can actually meet their current payments if they skimp and struggle for a couple of years. There is no shame in this. Some might negotiate lower payments that they could meet. Under Capitalism, most would figure they have been burned and have learnt their lesson.(2)
Instead, politicians from both parties want me to do more than help my neighbors. They want to convince me this is in my selfish interest. Why? Foreclosures do not bother me. And, I don’t think my neighbors really want my charity. That is to say: they would not want it on those terms. However, when the charity is positioned as saving the economy, they find themselves in a happy position: turns out, that saving them is the right thing to do. They’re more than willing to be rescued for my sake. They’re happy to be saved if it helps me out!(3)
This post is to say: I don’t mind the falling prices and the foreclosures. Any government force used on banks to stop foreclosures does not have my sanction. Every such tax-financed subsidy comes from someones real wealth. Part of it comes from mine. I will not pretend it is in my self-interest.
(1) Already, the still-falling prices have caused the following: the number of existing homes being sold is not longer falling drastically. For more, check these Carpe Diem posts.
(2) Look around you at your own friends and neighbors. I think you will see that some made bad decisions, but most can get through this with a struggle.
(3) Not to suggest that people really identify it so explicitly, but they rationalize it thinking that if the government saves them it is “good for the economy”.