How the Government can Fix the “Foreclosure Crisis”

TARP, bailouts, cram downs, loan modifications. Grants, workshops, faster short sale responses. The list of ideas and thoughts on how to fix “the foreclosure problem” are almost as endless as they are bureaucratic, and expensive.

Here is a thought…

What if we did nothing?

Blasphemy! DO NOTHING? “Are you insane? We have to do something… why we can not simply stand around and wait for this thing to fix itself!’

Why not?

Markets, be they stock markets, commodity markets or real estate markets all behave in similar fashion and are guided by basic economic principles. The Law of Supply and Demand, the economic general equilibrium theory, elasticity – these and more dictate the behavior of markets, including the real estate market.

Back in 1776, Adam Smith wrote about the “invisible hand” in The Wealth of Nations. Grossly over-simplifying and paraphrasing, the theory of the Invisible Hand states that the greatest benefit to a society is brought about by individuals acting freely in a competitive marketplace in the pursuit of their own self-interest. 

The government really has no place interfering in a free market economy. The real estate market will, over time, move toward equilibrium and “fix itself”.

Already we are seeing a shift in the lender-owned home market in some of the nations hardest hit areas – Phoenix, Las Vegas, most of California – all are showing signs of recovery. At this writing, there is just under a one-month supply of bank owned homes in the greater Phoenix metro area. Yes, some of this is a result of major lenders and GSE’s (Government Sponsored Entities –Fannie Mae and Freddie Mac) imposing a moratorium on foreclosures, but it is also a result of the aforementioned economic law and principles in action.

Prices have plummeted, driving investors and regular homeowners alike to see value in the purchase of real estate. Demand is up, supply is down. Take a look at a supply and demand curve, and what you’ll see is a market on the edge of – gasp! – prices about to increase.

Supply and Demand isn’t a theory; it is an economic law. The real estate market wants to be in equilibrium, and inventory and demand and pricing will over time adjust on their own accord to reach this equilibrium.

The question of course becomes one of whether or not these natural adjustments will occur swiftly enough to keep the real estate market from spinning down the toilet.

As one who sells real estate for a living, in Phoenix, Arizona, I think I could make a reasonable argument that the market has already been flushed down the toilet. Home values are now 50% off their highs of two to three years ago. Large brokerage firms are shuttering the doors on offices. Real estate agents are finding “real jobs”, filing for bankruptcy and facing foreclosure themselves.

The problem with the government stepping in to “fix” the market is, and let’s be honest here, they don’t know how to fix it. That is not their fault. No one knows how to fix it. No one has successfully implemented a long-term fix for a market as complex and dynamic as the real estate market.

Oh, economists and banking experts and wizards of all flavors can wax eloquently and ponder and propose all sorts of plans, processes and procedures. But the bottom line is no one knows if anything can truly fix the problems in the market.

Can we even define “fix”?

What does a “fixed” foreclosure market look like? Does that mean that there are no homes in foreclosure? (That never has happened and is just a wee bit unrealistic). Do we defined “fixed” to mean every man, woman and child that wants a “piece of the American Dream” becomes a homeowner? While that ideal may sound nice and work in some place just this side of Nirvana, the reality is that homeownership is not a right, it is a privilege that is earned – and not everyone will earn it (or even want it).

Is “fixed” some certain level of foreclosure inventory? If so, what is that number and who decides it?

What most people want appears to be some sort of normalcy in the real estate market – a balanced or neutral market that is neither completely lopsided on the buy or sell side with gradual home value appreciation. 

I contend that the government needs to step aside and quit trying to influence market dynamics. Clearly, foreclosure is not fun for those facing it. Watching your home decrease in value is hardly anyone’s idea of a good time. But the belief that home value only goes up and that banks and lawyers and politicians can legislate fundamental change in economic law needs a reality check.

They can’t. All they can do is muck things up. We may see short term “fixes” and glimpses of a sunshiny day, but real change in the market will only come with allowing market forces and dynamics to play out.

There is another economic law – the Law of Unintended Consequences. It states, “that actions of people—and especially of government—always have effects that are unanticipated or unintended.”

Yes, some unanticipated or unintended effects can be good. But they can also be bad. Very bad. And the bottom line is, we don’t know what could happen.

I say let the economic laws and market dynamics play out. Let the market adjust. It will adjust. It always does. It may not adjust as quickly as we’d like, but adjust it will. That may mean more banks close, and some homebuilders cease to exist. It may mean more people will lose their homes, as sad as that is. But it is the only solution for the long-term health and stability of the real estate market.

Surely someone out there disagrees with me completely. And that’s OK. What do you think the government should do to fix the “foreclosure crisis”?

Photo credit:  Courtesy of the ubiquitous Jeff Turner, aka respres, on Flickr. Under a Creative Commons License.

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