Let housing find its clearing price
James Saft

The U.S. government should just get out of the way and allow the crash in U.S. housing; the market is too big, has too far to fall and Americans’ finances are too strained.

President Barack Obama’s measures, unveiled on Wednesday, are part of a $275 billion plan to try and stabilize the housing market and prevent foreclosures. It aims to encourage lenders and their agents to cut repayments for homeowners in difficulties to lower, more affordable levels as well as other steps.

“You probably have about two to three million homes that we overbuilt, a lot of those have to be converted to rental units. We overbuilt on the high end of the market. We just don’t have enough people in this world who can afford these high-end homes,” said Paul Miller, a banking analyst at FBR Research. “Government should just get out of the way.”

While the maths often cited is that a repossession and sale can cost a lender 50 percent of the valueof the loan, that rather attractive number hides the fact that modifying loans successfully is just very difficult.

Data from the Office of the Comptroller of the Currency shows that more than 53 percent of loans modified in the first quarter of 2008 had re-defaulted again within six months. Nearly 36 percent went bad within just three months. And this was when the U.S. economy was in better shape than it is today and unemployment lower.

My comment: Allowing prices to fall to a market clearing price level is of course the way out and what many of us who are of the Austrian persuasion have been calling for now for some time. Unfortunately politicians, who are probably the most clueless regarding the economy, are afraid of appearing irrelevant so they are interfering in this process by introducing all of these stupid plans. This especially applies to Obama who was swept into office as a neo messiah. He feels he has to do something in order to justify his election by the hoi polloi. He will fail as economic reality and the marketplace will not be overcome by government.

John Polomny
The Real Deal