It is Assumed That the Key to the Housing Problem is Stopping Foreclosures

March 12th, 2009 | Tags: Foreclosures

The Obama administration has a half plan by assuming that the key to the housing problem is stopping foreclosures. But many experts hold contradictory views.

All agree that the housing recovery is vital for pulling up the general economy because it is this that that kicked off the collapse that finally has led to recession. The delinquent mortgages were at the root. The housing prices tumbled and gnawed into the confidence of the consumers affecting the whole cycle of borrowing and spending. From 2007 those who had jobs related to the housing industry – carpenters, plumbers, realtors, appraisers, interior decorators etc – have all been sitting idle. Jobs have vanished.

The market has lost its balance with there being too much supply and too little demand of houses. Huge lists of unsold houses have pressed down prices and construction activity. During the booming and zooming years prices rose too high because credit was given without thinking recklessly. Thus this painful adjustment is to some extent is unavoidable. But by this time that process should have been completed.

Today housing has become affordable as never before thanks to falling prices and lower mortgage rates (currently 5%). According to the “affordability index” of the National Association of Realtors that calculates the family income that is required to buy an average priced house. This affordability is at its peak since the index started to record from 1970. 20 % down payment is assumed and the monthly mortgage payment is taken to be 25% of the earnings of the borrower.

But in reality the demand has not increased. In January the figures showed continued decline in sale of new and old houses dropping by 10.2% and 5.3% respectively. Buyers seem to have gone on strike. This poses a pertinent question – why is this so?

Perhaps the potential buyers are not getting loans. It may be said that the people are so depressed that they are apprehensive about buying. The most important explanation for this is deflationary psychology. This means people think that the prices will fall further. What was $250,000 yesterday has become $200,000 today but the hope is that tomorrow it will drop to $175,000. So the buyers are playing a waiting game.

Unless this psychology is broken things will not start to move positively. The more the buyers wait the more will prices continue to fall. The Obama government is not giving due attention to this aspect of the problem.