What's wrong with my logic

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Saffron's picture
Status: Gold Member (Offline)
Joined: Aug 29 2009
Posts: 250
What's wrong with my logic

 Articles like this are driving me crazy and I need help to understand where my logic is wrong. I just don't get why the obvious option is not placed on the table and dealt with. Here's a clip from the article which was in the WSJ and titled something like "Government considers renting foreclosed properties"


The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter.

While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.

Trimming the glut of unsold foreclosed homes on the market is "worth looking at," said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

The "glut" they are speaking of is due to the fact that despite prices falling, they still have not fallen past the bubble and they obviously have not fallen to what capitalism would suggest is the true value ... the point where they start selling! Banks are keeping houses on the market for many months past the point where prices would have previously been dropped, so they are keeping them artificially high. I understand they are doing this because an unsold house that had previously sold for $500,000 is considered an asset on their books, whereas that same house sold at $300,000 is a loss. We all know the banks are immoral and unethical, so this is not a huge surprise. What I don't understand is why the government would consider action like the above rather than pressuring the banks to lower the prices till they sell. (And yes, I am totally aware the government is immoral and unethical too, but it isn't profiting here the same way the banks are. I also don't give a hoot that "government pressuring the banks" doesn't sound like a democratic republic because democratic republics shouldn't be giving bailouts in the first place.) 

Despite high unemployment, I think lowering house prices till they start selling would be a boost to the economy. For one,  people still do need to live someplace, so you are looking at either buying or renting. Renting provides an income to a landlord, but does not boost the economy much otherwise. Renters are more likely to borrow or buy things like furniture, drapes and appliances secondhand, whereas buyers are often eager to add to their new home. Same with remodeling - you wouldn't do it in a rental. Yes, many are out of work and many more are cautious about spending (not a bad thing in itself,) but 20% unemployment means there are still many who are working ... I realize it's not 80% and that many who are employed are under-employed ... but we are talking about a push in the right direction, not a magic bullet. And even 60% employed means there are a lot of people who would jump at the opportunity to purchase a home. I'm sure there are also retired/secure homeowners who would probably help their underemployed adult children with a home purchase and lest we not forget, even in the current climate there are always people who have been savers and have been waiting for a home to get within reach rather than outrageously borrowing for one that is not.

As mentioned above, I realize there is a lot of dishonesty going on that is getting in the way, but what I don't understand is why I don't even see the idea of letting prices fall to the point of sales picking up considered. Instead we see a lot of articles about families facing the possibility of being displaced because their house has fallen in price. Except in cases where the breadwinner has also lost his/her job (and that is not always the case) this is not even logical. If they were making the payment before, why can they suddenly not make the payment when the house is worth less? So when looked at deeper, we find the shenanigans of mismanaged money and robbing Peter to pay Paul and all sorts of things that Americans have basically learned is ok to do. But rather than unlearn this, we are now adding rob Patrick, who's been faithfully saving his hard-earned money waiting for his chance to buy into the American Dream ... which he now cannot ... while he watches his more unscrupulous neighbors remain mortgage-free in houses that banks will not foreclose on.

I know I'm writing to the choir here ... the chickens woke me up early and I had quiet time to vent.

~ s

SteveW's picture
Status: Gold Member (Offline)
Joined: Jan 21 2010
Posts: 490
Saffron wrote:  Articles
Saffron wrote:

 Articles like this are driving me crazy and I need help to understand where my logic is wrong. 

....As mentioned above, I realize there is a lot of dishonesty going on that is getting in the way, but what I don't understand is why I don't even see the idea of letting prices fall to the point of sales picking up considered.

Saffron, it seems you have a clear understanding of what is going on but you neglected to completely consider one point. The banks are insolvent i.e. bankrupt. Instead of restructuring them in 2008 they were converted into zombie banks by the TARP and other bailouts.

As you say banks carry an asset on their books at the gross value of the defaulting loan and don't realise a loss on their books until the asset is sold. This was again due to a change in regulation allowing the banks to value their assets at "cost" and not at mark to market. So every sale made by the banks results in a loss to their capital base. In 2008 they were grossly over-leveraged resulting in the new Basel III regulations being drafted for "too big to fail banks". So now the banks are unable to lend and are in the process of recapitalizing by borrowing from the Fed at about 0% and buying (supposedly) top rated Treasuries.

The whole mess is the result of incorrect handling from the start. In the free market companies that fail and become bankrupt are supposed to die and/or be taken over. Perfectly good regulations existed for the FDIC taking over and restructuring even the biggest banks, protecting deposits to a certain level and wiping out equity and probably much of the bondholders. It would have been traumatic but a thorough cleansing would have destroyed a lot of money and allowed the system to continue with a lower level of debt. But since the banks own government their debt was simply shifted to the taxpayers and the total debt is now a bigger monster.

So as commented upon its all lie, extend and pretend and kick the can down the road.

BTW, as a Canadian, don't get me on about the preverse incentive of your government allowing mortgage interest to be tax deductible or the deal being cooked to grant banks immunity from civil lawsuits. One law for the rich and another for the rest.

tictac1's picture
Status: Silver Member (Offline)
Joined: Sep 25 2009
Posts: 175
I'm with Steve, the big

I'm with Steve, the big reason is that the banks are actually insolvent, a reality which would immediately come home to roost if the homes were somehow forced onto the market.

I'm hearing that many of those properties being offered at way-too-high prices are actually being sold for far less in some areas.  A co-worker placed an offer on an REO property, totally low-ball, only to have it accepted almost a YEAR later.  So SOME properties are being sold at actual value (what someone is willing to pay, in this economy).

The other side of the argument is I don't believe our government had any intention of actually helping the people, this was and is primarily about keeping money flowing into the pockets of the elite that run the banks.

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