How to Stop the Drop in Home Values?

[Gerald]

HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs. But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don’t want to provide any more help to the banks that made loans that have gone sour. But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.House prices are falling because millions of homeowners are defaulting on their mortgages, and the sale of their foreclosed properties is driving down the prices of all homes. Nearly 15 million homeowners owe more than their homes are worth; in this group, about half the mortgages exceed the home value by more than 30 percent. Most residential mortgages are effectively nonrecourse loans, meaning creditors can eventually take the house if the homeowner defaults, but cannot take other assets or earnings. Individuals with substantial excess mortgage debt therefore have a strong incentive to stop paying; they can often stay in their homes for a year or more before the property is foreclosed and they are forced to move.

http://www.nytimes.com/2011/10/13/op....html?src=recg


Note: October 12, 2011

[Armistead]

Didn't we already try this by giving Banks large bailouts so they could rework loans, even though most did nothing but invest it as they pleased since there were no regulations or guidelines to how they used the money.

Banks are sitting on trillions in unused homes, if Chase bank alone flooded the markets with all the foreclosed homes they have at once it would drive prices down even more. The banks don't really care, the taxpayer already paid the cost of the home for them, it's just a double dip when they can sell them.

[Jimbuna]

Originally Posted by Armistead

Didn't we already try this by giving Banks large bailouts so they could rework loans, even though most did nothing but invest it as they pleased since there were no regulations or guidelines to how they used the money.

Banks are sitting on trillions in unused homes, if Chase bank alone flooded the markets with all the foreclosed homes they have at once it would drive prices down even more. The banks don't really care, the taxpayer already paid the cost of the home for them, it's just a double dip when they can sell them.

Yes, agreed...but I speak as a homeowner without a mortgage (if I'm to be honest).

[magicstix]

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

Exactly.
Anyone who bought here in the last 10-12 years paid well over the odds(unless in was a special sale)
The homes here will stop dropping in value once they have dropped by about 70% and are once again at real values.

[MothBalls]

the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent.

Horsehockey. It never existed in the first place.

The cost of land, labor and materials should determine the value of a home, nothing else.

Same thing for the price of gold. How much it costs to get it out of the ground and process the ore should be the determining value. People think gold is a safe investment, more horsehockey.

Same with the price of oil and gas, the cost of a vehicle, and the cost of food. Once we end speculation, futures and derivatives from the markets we will see prices correct themselves and stabilize. Won't happen though, it would totally screw over the 1% who make the most from it.

[em2nought]

Originally Posted by MothBalls

The cost of land, labor and materials should determine the value of a home, nothing else.

The price of materials hasn't dropped at all. You can't build to current codes for the price of a foreclosure.

[August]

Other things have an effect on the value of a house as well. Location, history and architectural style for example.

[tater]

Originally Posted by magicstix

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

This.


It's important to realize that the US housing market is very different than most of the world, too. It is my understanding that in Europe loans are "consequence" loans. Meaning that walking away is not an option—if you do, you'll be out a house, AND have garnished wages, etc. The US system allows people to brush themselves off and start over, but also encourages speculation (particularly combined with pressure to loan to deadbeats, etc).

Best solution is to stop underwriting loans (by the government), so that banks have real risk so housing prices can come into line with reality.

[mookiemookie]

Originally Posted by magicstix

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

Winner, winner, chicken dinner.

Trying to muck with the market correcting itself only draws out the whole painful process longer. I agree with what he says about the wealth effect and whatnot, that's all true, but sooner or later we need to take our medicine and let the market find it's natural equilibrium.

Now if you want to talk about bulldozing excess supply, that's another intriguing story...

Originally Posted by MothBalls

The cost of land, labor and materials should determine the value of a home, nothing else.

That's not the way economics works. The value of a good is determined not only by the factors you mentioned, but by its usefulness, it's scarcity, and the demand for it.

[August]

Originally Posted by mookiemookie

...but sooner or later we need to take our medicine and let the market find it's natural equilibrium.

Besides I seem to recall a lot of complaining just a few years ago about the lack of affordable housing. Surely this drop in house values will do a lot to address this...

[Herr-Berbunch]

In this country you didn't used to be able to get a mortgage for more than (IIRC) two-and-a-half times your annual salary as a couple, or three times as an individual.

So if I earnt £25k (which I did years ago, but don't now) I could've got a mortgage for £75k on my own.

Then came along self certification (under Labour for those interested!) and if I saw a house for £130k all I had to do was pretend to make £44k. As long as I could afford the initial repayments they offered - I was in a nice new abode worth almost double what I could've got a few years previously.

Then the interest rates would rise, other bills would rise, and hey-ho, I'd expect someone to come and help me out. That'd be you, the taxpayer! Why should my family and I lose out on this lovely home because somebody made me lie on a mortgage application form? Oooh, you've dropped interest rates, how kind, thank you banks. Sorry savers.

The above is all ficticious, I've never owned a house, or had a desire to, but I just think that those that lied should get their comeuppance!

[mookiemookie]

Originally Posted by Herr-Berbunch

In this country you didn't used to be able to get a mortgage for more than (IIRC) two-and-a-half times your annual salary as a couple, or three times as an individual.

So if I earnt £25k (which I did years ago, but don't now) I could've got a mortgage for £75k on my own.

Then came along self certification (under Labour for those interested!) and if I saw a house for £130k all I had to do was pretend to make £44k. As long as I could afford the initial repayments they offered - I was in a nice new abode worth almost double what I could've got a few years previously.

Then the interest rates would rise, other bills would rise, and hey-ho, I'd expect someone to come and help me out. That'd be you, the taxpayer! Why should my family and I lose out on this lovely home because somebody made me lie on a mortgage application form? Oooh, you've dropped interest rates, how kind, thank you banks. Sorry savers.

The above is all ficticious, I've never owned a house, or had a desire to, but I just think that those that lied should get their comeuppance!

It was much the same here. People had the attitude that "hey the lender knows what they're doing, they wouldn't loan me the money if I couldn't repay it." But the lenders never cared about the loans being repaid. They sold them off to the securitizers on Wall Street to be packaged into garbage securities.

I would go so far as to say the number of loans made that don't rely on income verification and take the borrower's word for it should be a number around zero.

[Osmium Steele]

Originally Posted by mookiemookie

It was much the same here. People had the attitude that "hey the lender knows what they're doing, they wouldn't loan me the money if I couldn't repay it." But the lenders never cared about the loans being repaid. They sold them off to the securitizers on Wall Street to be packaged into garbage securities.

You are on the right track, just keep digging. It does not begin, nor end, with Wall Street. The private securitizers were a symptom, not a cause.

[Jimbuna]

Originally Posted by Herr-Berbunch

In this country you didn't used to be able to get a mortgage for more than (IIRC) two-and-a-half times your annual salary as a couple, or three times as an individual.

So if I earnt £25k (which I did years ago, but don't now) I could've got a mortgage for £75k on my own.

Then came along self certification (under Labour for those interested!) and if I saw a house for £130k all I had to do was pretend to make £44k. As long as I could afford the initial repayments they offered - I was in a nice new abode worth almost double what I could've got a few years previously.

Then the interest rates would rise, other bills would rise, and hey-ho, I'd expect someone to come and help me out. That'd be you, the taxpayer! Why should my family and I lose out on this lovely home because somebody made me lie on a mortgage application form? Oooh, you've dropped interest rates, how kind, thank you banks. Sorry savers.

The above is all ficticious, I've never owned a house, or had a desire to, but I just think that those that lied should get their comeuppance!

Good post...iirc about 25 years ago you'd be allowed 2 1/2 time the main/larger wage earner + once times the lower wage earner.

3 x was indeed the max for a sole buyer.

Mind you, in those days you could depend on houses increasing in value on a month by month basis.