So, as you would if your doctor told you that you have an infection in your heart, we as a country have a choice to make. We can treat it or not. It's that simple.
If we don't treat it, housing values will continue to drop. Billions, if not trillions of dollars in home equity (the largest single source of wealth in the country, by the way) will evaporate. Builders will stop building (which is the first stage in the market "correcting" itself). This in turn will lead to layoffs which will lead to lower consumer confidence which will lead to people spending less which will lead to additional layoffs, so forth and so on. The eventual outcome will be recession and possibly even a depression.
The worst case scenario here is that the US economy falls into a depression and all of the foreign investors that are now propping up our economy pull their money out.
Suffice it to say, if we leave it up to the markets to fix the problems on their own, it can and probably will get ugly!
Dr. Bob's Prescription
The other option that we have is to accept reality as it is and not as we would want it to be. That is, we can examine what caused the mortgage market to get out of alignment in the first place which in turn is what has led to the housing market falling out of balance.
As I've talked about before, my opinion is that it isn't the housing market itself that was out of balance. If the credit markets hadn't collapsed we would all still be happy buying and selling our homes. The economic reality is that our population is continuing to grow and as long as this is true, these additional people will need roofs over their heads.
Even in the markets that probably did get out of hand, there was a reason that these markets got carried away; these markets are where people want to live! According to the National Oceanographic And Atmospheric Administration coastal areas of our country which account for only 17% of our contiguous land mass contain over 50% of our population. They have also experienced population gains of 28% in the period between 1980 and 2003 and there is no reason to suspect that these trends aren't going to continue.
So how do we fix the problem?
There are a number of steps that I feel that we can take in order to cure this infection;
1) Regulate how mortgage backed securities (MBS) are packaged, sold and rated.
Specifically we need to regulate the ratings agencies such as Moody's and Standard and Poors so that they aren't influenced by the big Wall Street investment houses when rating MBS's.
2) We need to give each and every home owner who is now in distress an opportunity to work their loan problems out.
This will probably mean that the government needs to step in and purchase these mortgages from the institutions that currently own them. These non-performing loans should be able to be bought at a steeply discounted rate and once the government owns them, it can then renegotiate the terms of these mortgages to a point where the borrowers are able to perform.
The loans that will then be performing can be seasoned and in turn sold back to the secondary mortgage market, most likely at a profit!
3 ) Foreclosed properties need to be liquidated in an organized and systematic manner.
The properties who's borrowers aren't able or willing to work their loans out and that end up being foreclosed upon need to be secured and released upon the market at a pace that doesn't depress real estate values in their particular market area.
Once these steps are taken the markets will heal and everybody will feel better! Home values will stabilize, builders will start building again, consumer confidence will rise and we can all go back to living our lives knowing that homeownership is still the single best way of creating a wealthy and stable country.
R. B. Mitchell
R. B. Mitchell is the president of ValueList Real Estate Services, St. Louis' largest discount/full-service real estate and mortgage company. To read more of Bob's writings or to find out more about ValueList and our flat-fee listing program, please feel free to visit our web site, valuelistre.com