Solving the Real Estate Crisis, And there is one!

This item was originally put on the blog a couple of days ago.  For some reason, it disappeared ... so here it is again.  JL

One of the things dragging our economy down is the real estate crisis.  Builders continue to build even though demand for new homes is down, adding to the supply.  The inventory of older homes on the market is contaminated by houses which are in various stages of foreclosure or possibly available as a short sale because the amount owed on the mortgage is greater than the selling price of the house.  They are "underwater."  The low prices these situations create brings down the prices on “clean” resales and new construction as well.  It is estimated that in certain areas, half of the homes which are mortgaged are worth less than the outstanding balance on the mortgage. In Las Vegas, 70% of mortgagors are in this position.  People are walking away from their unsalable properties via “strategic” foreclosures  and this doesn’t only happen to the unemployed or overextended working family.  Multi-million dollar mortgages are being walked away from by the very wealthy who know when to jump ship on an investment, just as they would walk away from a stock they bought at $100 a share that is now worth pennies.

Until this problem is solved, the real estate crisis will continue.  People who have been paying their mortgage payments, seeing neighbors who are not paying theirs, and seeing their equity drop daily, are getting angry.  The “professionals” were talking about the real estate market turning around in 2011.  Now they talk about a turnaround in 2012.  Here’s the truth as I see it.  The real estate market will not turn around on its own for at least ten more years. By that time, short sales will be the rule for almost all mortgaged properties and the new construction business will be a memory.  If we are lucky, the United States will still be a democracy. But this problem can be solved.  Here is a solution. You are invited to come up with your ideas.  Here are mine.

Owning versus Renting: Most of the people in short sale situations or already in foreclosure never should have been approved for a mortgage.  They should be renters, not owners.  There is nothing wrong with being a renter.  Unfortunately, the real estate industry with government support envisioned every American as a homeowner.  I wonder what they were smoking when they came up with this.  But this is where the solution to the real estate mess begins.

Paying Off  "Underwater" Balances: The government should pay off all outstanding balances on mortgages on homes that are worth less than those balances.  They also may have to “reverse” some ongoing foreclosure actions which have not been finalized as well. But it should do so paying only twenty-five cents on the dollar.  The banks should run to grab this offer since they will never get even that reduced amount from the homeowner, and if they foreclosed, they would have a house on their hands to maintain for years in a market which is ever-spiraling downward.  Twenty-five percent of what they are owed might be a good deal. The government will become the temporary “landlord” of the people living in these properties. 


Where the Money Comes From:  Unfortunately, our government does not have the money available to do this. They will have to borrow it.  I suggest that rather than go through the usual issuance of billions of dollars in treasury bonds to do this, a direct appeal be made to the American people as was done during World War One (Liberty Bonds) and World War Two (Defense Bonds).  We are in such a crisis now.  Denominations would range from $25 to $1,000,000 and interest would be tax free below a certain amount (perhaps $10,000 in interest) and taxable at a greatly reduced rate above that amount.  I think that would produce enough revenue to pay off the “underwater” mortgages.

      Selling off the Properties:  But Uncle Sam would not remain a landlord for long!  To recoup as much as possible of the money spent to pay off those underwater mortgages, and pay off the bond holders, the government would auction off the properties to the highest bidder who would then become the landlord.  As an inducement for bidders, there would be significant real estate tax concessions accompanying the properties. Their tenants would be, in most cases, the original mortgagor who could remain living where they were, but as a renter rather than as an owner.  I envision the ultimate landlords as being large insurance companies and subsidiaries of major banks.  As a last resort, and this is an alternative to be avoided, they might also be the tax-supported public housing authorities of cities or states.

In addition to the real estate crisis, for which I have just offered a solution, there are two other areas which must be addressed in order to solve our economic crisis.  One is the degree of regulation which our money industry, i.e. Wall Street, deserves and what changes in the way Wall Street operates are necessary.  The other is the problem of how our government must go about balancing the amount of spending it does in a given year with the amount of revenue it receives in that year, including long–term debt acquired to meet those expenses.  These problems are not without solutions. These topics will be dealt with in future postings.  Your input is invited.  It will be published if you wish.