Tuesday, October 12, 2010

Forclosure freeze is a bad idea

Lots of talk recently about a nationwide freeze on foreclosures.

The thinking is that this will stop the flood of new foreclosures onto the housing market which is driving down the value of homes, and it will keep people in their homes.

However, there are many more reasons why a freeze would be a bad idea.

One of the biggest problems with the economy right now is the falling value of homes. And it is directly related to banks lending money to people so they could buy homes they could not afford. That was bad business and until all that bad lending is flushed out of the market, the true value of property will remain uncertain.

Getting the government involved -- with a freeze or the recently proposed interest-free loans to homeowners in trouble -- will delay that true-value solution and prolong the uncertainty.

One other major factor in this housing-value uncertainty is the number of people living for free in foreclosed homes. This could be in the millions.

Quite simply, the process of foreclosing on an occupied home takes months at the least, and can drag out into years during a crisis like the one facing banks today. The backlog and the legal delays can result in some families living in homes for years without paying rent, or mortgages, or taxes or insurance. They take advantage of the crisis and live for free.

Whether or not this is legal or morally right is too long a topic for this column, but it is a major factor in the problems with this economy.

When there are millions of people living for free in house that cannot be sold, that unbalances the market. All those people should be paying to live somewhere, whether in rentals or in homes they are purchasing. The fact that they are not paying creates a huge hole in the economy.

This hole is increased by the glut of houses for sale at decreasing prices. Why are those homes decreasing in value? Because there are too many for sale and too few buyers. Why are there too few buyers? Because too many people who should be renting or buying are living for free. Because credit is tight and the few people who can buy are those with cash. And those people with cash will not buy if they believe the value of the homes will drop even further. They will wait for the bottom.

When will the trend start upward? When all of those people are foreclosed out of the homes they cannot pay for, or are not paying for, and enter the rental market. That will drive up the value of rentals and people will start buying places to rent out. When that demand resumes, the value of homes will rise.

Government intervention just delays that process and prolongs the present economic doldrums.


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