The Housing Market

The solution for existing housing market troubles is nowhere in the sight. It seems to be getting worse as the time goes on. We see daily that the government is trying to solve the crisis that we are in.

The feds are considering guaranteeing payments on some troubled mortgages. The move would aim to reduce foreclosures by pushing investors and lenders to agree to restructure loans.While such an outcome would no doubt keep some residents in their homes, it's worth noting that the government has yet to put forth any proposal that approaches what it has done in the financial sector. Government support for homeowners has been limited to a few modest foreclosure-reduction and mortgage-refinancing plans. But with tens of thousands of jobs being lost every month, the decline of values in the housing market - the biggest source of Americans' personal wealth - is weighing even more heavily on the economy. House prices have fallen 17% over the past year. Foreclosure filings rose 71% from a year ago in the third quarter. The government's failure to act pre-emptively and decisively on the housing crunch has only added to the problem.  The comments Thursday by FDIC chief Bair suggest that the government's first priority is to speed the restructuring of troubled loans. But there are numerous hurdles to loan workouts, not the least of which is that some borrowers may simply have bought houses they couldn't afford no matter the terms of their loan.

 

Still, given the scale of the crisis, a piecemeal approach to restructuring mortgages may not be enough. Millions of homeowners could end up in trouble in a deep recession, because they bought houses during a decade when prices essentially doubled even as incomes were flat. Now, prices are moving back into their historic relationship with rents, which will leave many borrowers owing more than their houses are worth. It's tough to devise a housing rescue plan in large part because there's no consensus on how the burden of falling house prices should be shared. Should lenders and investors have to take substantial losses, as envisioned in, for instance, the FHA Secure refinancing plan that was enacted earlier this year? Or should the government consider an approach that would guarantee mortgage payments across the board, and then leave taxpayers on the hook for losses taken in any mortgage restructurings?

  Either way, there's more pain ahead for both lenders and homeowners. Even after the declines of recent years, the cost of buying a house in many areas remains well above the price of a comparable rental.

Which way all this is going to go the time will show.