housing market
By Chase Boruch
As I am sure many of you are aware, the housing market in the United States is not in the greatest of shape. There is division of opinion as to what is the best way to address the mortgage mess. When it comes to current policies to “fix” the mortgage meltdown there are not many. There has been limited guidance from the federal government and mortgage lenders. The plan proposed by the Bush administration in late 2007 proposed to freeze rates on loans to borrowers with poor credit. Some argue that the current situation is mainly the subprime borrower’s fault. Many borrowers lied about how much money they were earning on mortgage applications. Others knowingly bought a more expensive home than they could afford with the hopes it would continue to rise in value.
Others blame the mortgage lenders for not verifying borrower’s income. Lenders have also been blamed for predatory lending, pushing borrowers into loans that they probably could not afford. Lenders and mortgage brokers may also be to blame for the sale of mortgage backed securities.
When considering all of the entities involved in the current housing market, there is only one reasonable way to address the mortgage mess: allow the free market to correct it. It is very true that lenders, borrowers, investors, homebuilders, and home improvement stores will lose money. If low rates are frozen for subprime borrowers, there will be less incentive for homebuilders to slow or discontinue home building. The supply of homes is the root of this problem. It is inevitable that the demand for homes will continue to decline if more borrowers default. This may lead to some home builders going out of business; however, this is probably the best place for a loss. With a smaller supply of homes the value of homes will begin to rise. This will help not only borrowers but lenders.
It is better for the economy as a whole if the homebuilders lose money rather than the lenders and investment banks. This is important because lenders and investment banks have an influence on much more than the home market. Home builders are in a largely price-competitive market and the financial ruin of some of them will allow others to rise. The least valuable entity of the home market to the United States at this point is homebuilders. Homebuilders and their excessive home construction is what caused this current problem. Because the current housing situation could lead the United States into a recession, it is best to allow many of them to go bankrupt. This could allow once small home building companies to take a bigger part in the home market. New companies may offer deals to home buyers and they may build homes at a cheaper rate. This would help a recovering home market when the demand for homes rises in the future.
There will certainly be losses associated with the free market correction. Many borrowers experiencing climbing mortgage rates will probably lose their homes. Other borrowers will go bankrupt trying to stay ahead of adjusting mortgage rates. Housing sector companies, such as lenders like Countrywide, will continue to see their stock price drop if you chose to not freeze rates for borrowers with weak credit.
I think the best question to ask is, what does everyone else think will fix the housing market?