At best, stemming the rate of foreclosures will be a costly way of limiting the extent to which the US housing market overshoots. President Barack Obama’s housing plan, announced on Wednesday in hard-hit Phoenix, Arizona, might stop the slide in home prices due to neighbouring foreclosures by “up to $6,000 per home”, according to hopeful Treasury estimates. That is a weak justification for intervention on this scale. Hosing suburban lawns with once unimaginable quantities of public money will interfere with the purgative process by which prices fall to clearing levels and postpone the moment at which a genuine economic recovery can commence.
Compared with the resources lavished on Wall Street, $75bn for subsidies to homeowners at risk of foreclosure is a bagatelle. The foreclosure tide, triggered by double shocks of negative equity and rising unemployment, is probably unstoppable. Home prices in cities countrywide have dropped more than 25 per cent since 2006 and if unemployment hits 8 per cent by the middle of the year, the Boston Federal Reserve reckons some 8.4m homeowners will be unemployed, of whom 35 per cent will have negative equity. It is far from certain that the president’s plan will make any difference to whether the majority of the vulnerable keep their homes.
The administration is making it easier for Fannie Mae and Freddie Mac to refinance some $200bn of underwater mortgages, giving lenders incentives to reduce mortgage interest payments and brandishing the stick of court-ordered capital writedowns for those that do not. But ultimately jobless homeowners will struggle, even if mortgage interest payments are cut to the proposed ceiling of 31 per cent of income. The fastest way to get the housing market moving again is not to limit foreclosures, tempting though that is, but to allow prices to fall rapidly to market-clearing levels. This package will squander public funds in delaying that process.
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