Many thanks to L for the best laugh I’ve had all day. Lawrence Yun, chief economist of the National Association of Realtors has offered his own solution for rising foreclosures across the country. In his proposal he uses the level of mathematical logic we’ve come to expect from the NAR and their economists:
Referring to other proposals currently on the table he said:
All of the proposals are well-intended and most will help mitigate foreclosure problem. But in addition to some aspects of the bottom-up solutions, what is needed and could well be far more effective is a top-down solution of raising the housing demand. As I wrote earlier, what is most needed in the current point in the housing cycle is to get the home sales rolling. Rising home sales will lower inventory and lower inventory will help quickly stabilize home prices. A recent Boston Fed study showed that home price movements and not interest rate resets as the primary determinant of foreclosures. If people have less or negative housing equity, then people have an incentive to default on mortgages and simply walk away.
There is plentiful pent-up demand. The difficult part is getting this demand unleashed into the marketplace, due the pervasive consumer pessimism related the housing market. The raising of the loan limit on FHA and Fannie/Freddie backed loans will help unleash some of that demand as more people will have access to lower interest rate loans. Lower home prices can also work to bring buyers to the market, but it is no guarantee because lower prices can also add to excessive pessimism and raise foreclosures.
What is critically needed at this important point in the housing cycle is a measure to assuredly and quickly raise home buying activity. This can be accomplished by providing a homebuyer tax-credit. A nationwide $5,000 tax credit (the same amount currently in existence for homebuyers in Washington, D.C.) will cost the federal government $40 billion. If factoring in rising economic activity and accompanying rising tax revenue, then the true cost could be minimal or even positively favorable. A reversal in the weakness in the housing market, which has been subtracting about one percentage point off GDP growth, can add $40 billion to the U.S. Treasury - essentially offsetting the cost of the tax credit. If the initial $40 billion cost is harder to swallow than a more targeted tax credit for only the first-time homebuyers will cost the government about $15 billion.
