Foreclosures Take The Economy By Storm, Again

The government might have expected that it could have some effect on foreclosure rates by working with banks to make money available to homeowners and by setting up programs for modifying existing mortgages to reduce monthly payments. Foreclosure numbers from the first half show that none of that has worked very well.

Foreclosure filings went up to 1.9 million in the first half, according to RealtyTrac.  The figure is up 15% from the first half of 2008, so the rate of acceleration is depressingly impressive.

It will not surprise anyone that unemployment is a primary cause of the foreclosures, which means that the figures are likely to be worse in the second half of this year. It also raises the issue of whether the government really wants to be in the business of saving homeowners who want to stay in their houses and of helping banks provide more credit to people who want to buy a home, especially for the first time.

Government intervention may slow the rate at which real estate prices fall and the rate at which people loss their homes, but 1.9 million foreclosures is an overwhelming number. Recent surveys show potential home buyers are still staying out of the market, based to some extent on their expectations that prices have much further to fall.

The government could withdraw from any meaningful effort to salvage home prices. There would be a certain cruelty to allowing people to be pushed out of their houses, but it is the only way for prices to quickly and brutally find a bottom. Once home prices have adjusted down anther 15% or 20% on a national basis, the concerns about buying a home may whither. The value of houses will have dropped back to where they were fifteen or twenty years ago in some markets and the bargain hunters will come out in force. Then, prices will slowly start to rise.

Douglas A. McIntyre