500k in las vegas in a marginal area? Not so much, unless it had significant land and could be subdivided.

As to your comment “When a family has to stretch $100k+ salaries to buy small homes in marginal urban neighborhoods, we are/have been in trouble for awhile.”

Why should anyone be entitled to a large home? Housing in the US has been underpriced for a long period of time. When I say underpriced, I mean that the cost one pays for a home is significantly less than the cost incurred to society in building the home. Suburbs are cheap as they didn’t pay the full cost of extending utilities, roads etc. Cities extended services trying to attract a tax base, all users of vehicles paid gas taxes, not just those using the new roads. This is changing, but for the last few decades, home costs have not paid the full costs of the negative externalities they create.

As an ethical point – why should i be entitled to a 2000 sf house for my family of 4? I rented a 800 sf house in college, that was the home of a family of 7! Families in other parts of the world do with much less. A few hours from where I grew up, a family of six shared a 15×20 room. I don’t hear much outrage for them.

We overconsume and don’t want to pay more for it.

As to the family stretching in urban areas – if they didn’t want to pay the cost they would move. Voting with the feet!

I don’t think Doom has ever considered (and I’ve never heard of ) HOLC, but the idea seems to be in the news today:

“Push grows for U.S. bad debt disposal agency”, by Kevin Drawbaugh, Reuters, September 17, 2008.

Wall Street’s turmoil and the Bush administration’s erratic responses are stirring interest in a potentially more decisive approach — a temporary agency to dispose of the toxic debt poisoning the system.

Various models — the Resolution Trust Corp (RTC) of the 1980s and 1990s, as well as the Home Owners’ Loan Corp and Reconstruction Finance Corp of the 1930s — are being discussed by lawmakers, veteran regulators, academics and analysts.

Sorry about the approval delay, Igor had you in spam-jail over the two links while we were out at coffee.

The government has long intervened in surplus goods to regulate the market to a stable level. Farmers are very familiar with government programs to stabilize crop prices and production by purchasing surplus goods, and giving incentives not to produce.

So why not home prices. Assuming that the problems could be worked out regarding the fixing of the “median income” and adjustments for property value killers such as deteriorated conditions, clean up etc., perhaps this could work. After all – the government has long used its eminent domain powers to purchase property for public use. And after the Kelo decision – economic improvement is a sufficient purpose.

Perhaps instead of 3 times minimum income alone – the formula used for eminent domain could be applied as an alternative, guaranteeing a purchase price for whatever the lower amount is.

So the government could purchase the homes – and use them for payment in lieu to government employees, military vets, teachers, etc. They could give/rent them to doctors and lawyers who volunteer to work pro-bono or at significantly reduced salaries. The “gift” could require some buy in – or could be phased over several years.

Assuming the kinks are worked out of this program – would it really affect the market? It would function like the FDIC, providing some guarantee to investors/purchasers, that they can spend their money on this as there is some recourse in case of a bust. Thus, those living with family, holding off on a purchase will be able to get back into the market. People in existing homes, who purchased variable, or other loans, can refinance as the LTV will be somewhat fixed. Thus some of the tide of foreclosures will be stemmed.

As to some of the comments
$500K homes in marginal neighborhoods – I would love to buy that houe in a marginal neighborhood of SF or NY.

As to the data – it is not really correct to evaluate plan using national data. That is you can’t take the national for sale price and divide by the national median income, at least to evaluate his plan. His plan is a market based system. Thus the best way would be to take the avg market price for listings in a metro/statistical/regional area and divide it by the median income for the same. You then take average multiplier across all the regions. Still don’t know what the number would be, but the data cited by Keller was the census bureau and the NAR.

Keller discusses the idea further in this article. http://www.marketwatch.com/News/Story/retooling-1930s-idea-could-halt/story.aspx?guid={6DF943BC-9311-4AB0-AB3A-0E7233C68499}

This idea is not new. I think a better idea is the one discussed in the article. That of a Home Owner’s Loan Corporation.

“The Home Owners’ Loan Corporation (HOLC) or Home Owner’s Refinancing Act, was a New Deal agency established in 1933 under President Franklin D. Roosevelt. Its purpose was to refinance homes to prevent foreclosure. It was used to extend loans from shorter loans to fully amortized, longer term loans (typically 20-25 years). Through its work it granted long term mortgages to over a million people facing the loss of their homes. The HOLC stopped lending circa 1935, once all the available capital had been spent. HOLC was only applicable to nonfarm homes, worth less than $20,000. HOLC also assisted mortgage lenders by refinancing problematic loans and increasing the institutions liquidity. When the HOLC ended its operations and liquidated assets, HOLC turned a small profit” en.wikipedia.org/wiki/HOLC

see also
http://www.house.gov/list/press/il10_kirk/HOLC_release.html
http://www.mtgprofessor.com/A%20-%20Purchasing%20a%20House/home_owners_loan_corporation_ii_-_a_fable.htm

BTW, has anyone noticed an uptick in strangers (adults) asking for money? While it has long been common in downtown Phoenix (and probably most major American city downtown business/government centers), I had my first such experience yesterday in a somewhat prosperous part of suburban Glendale.

Seriously, I think “modestly capitalized” is merely code for “not another cabinet-level government agency” or “temporary like the RTC”.

My excuse must be that while I’ve had plenty of math, I’ve only had first year accounting- so I finished off at the part where they told us that the accounts had to balance. I never had the more sophisticated “Enron” level stuff.

I’m sure a Wall Street accountant could show how this could be “modestly capitalized”, but it’s beyond my skills.

The other exacerbating issue is that prices have gotten so high in marginal neighborhoods (regentrification, coming soon!) that those houses are much more underwater than anyone could ever imagine.

What do we do? It has bothered me for awhile (no I am not insane I just have some skin in this game!). Some seem to think that homeowners should be required to take the full burden, some believe the banks should.

But in the end if people cannot sell at a loss because of their own hubris or the resistance of banks, how do we reach the floor? And how are people still getting financed to buy $500K homes in marginal neighborhoods?

Igor says…Failure

Remember. Critical thinking applied to the policies of the Ministry of Plenty will result in your placement in a re-education facility!

igor says “burn.” Maybe we should do that with the excess inventory, decreasing supply which would increase prices. WOW!!! Who knew it was that easy and that igor had the solution all along. Just do it before AIG goes under.

And how would this even put a floor on the prices? They would still be tied to the median income – if that goes down in any given area, then the government, and anyone else who had bought, is stuck with a home that isn’t worth what they paid for.

“This should put an end to constant and recurring markdowns, which are responsible for today’s mess.”

Throughout this whole thing, it’s always amazed me how hard people worked at trying to justify the bubble. In reality, it’s quite simple – if you make $50,000 a year, and have no down payment, then no, you cannot afford a $500,000 home. There’s no other discussion necessary. The problem isn’t deflating home prices – the problem is that lenders gave money to people who couldn’t possibly afford to pay it back!