A Case for Foreclosures?

Those who are looking for a silver lining in the current real estate market ought to read libertarian economist Steven E. Landsburg’s article in the current Slate.com.

Landsburg’s piece is entitled “The Case for Foreclosures.” He argues that the recent explosion in home foreclosures isn’t something to be concerned about.

First, Langsburg points out, foreclosure doesn’t destroy homes, it just creates new homeowners. Langsburg notes that homes are not ‘lost” in foreclosure – they simply change owners.

As Landsburg says “None of these foreclosed houses is going to disappear. After a foreclosure, one family moves out, and another moves in. We see the sad faces of the people moving out, but we don’t as often see the happy faces of the new homeowners moving in. Nevertheless, those happy faces are out there, and we should not discount them.”

Second, Langsburg claims that homeowners facing foreclosure are no worse off than those who never owned their own homes.

Landsburg maintains that “If you get to live in a nice home for a few years and then lose it to foreclosure, you are not worse off than someone who never got to live in a nice home in the first place.”

Nor, says Landsburg, should the government intervene to protect homeowners in foreclosure.

According to Landburg, there are many more worthy causes for government attention than people who can’t make their home payments: “Losing your house is painful. Never having anything to lose is even more painful. How do the feds justify spending money—and, rest assured, any program to stop foreclosures will cost money—to help struggling homeowners instead of, say, the struggling homeless?”

Landsburg also argues that government action to bail out homeowners would be a bad idea, since it would undermine the bank’s faith in being able to enforce their mortgage contracts, and therefore lead to them to be less willing to make home loans in the future.

Says Landsburg: “If banks can’t enforce contracts (or even if they “voluntarily” forgo the enforcement of contracts under pressure from the Treasury Department), they will undoubtedly be more reluctant to make loans in the future. Rest assured that somewhere out there—invisible to you and me but nonetheless real—is a young couple who, thanks to this intervention, won’t be able to get the mortgage they want next year.”

We’re going to stay out of the political and social issues that Landsburg raises.

We believe, however, that Landsburg seriously underestimates the overall impact of the housing crisis (and the related mortgage crisis) on the economy. We would note, too, that while Landsburg assumes that a foreclosed home will simply be bought (at a new, lower price) by another family ready to move in, the conditions of the current credit market make it more and more unlikely that middle-class families will be able to afford the necessary mortgages.

We also believe that Landsburg underestimates that extent to which the home mortgage crisis is itself the result of the banks’ unwillingness to extend credit rather than the other way around. In large measure, we think that the current crisis is being caused by the banks’ decision to restrict credit, not that the banks are restricting credit because of the crisis.

For this reason, we share Landburg’s skepticism about government efforts, particularly monetary actions, although our position is more practical and less ideological than his. Even if the government continues to lower the interest rate, it will have little effect on the housing market and the rising tide of foreclosures unless the banks decide to ease restrictions on credit.

And we don’t see that happening anytime soon.

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