Home Inventory, Prices & Economy

Quite a vicious circle there!

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Disposing off of Banks' foreclosure inventory via Defered Ownership Plans automatically shrinks the supply shock of homes looking for a buyer under normal home buying. So, the vicious cycle of slide in home prices and additional foreclosures unrelated to people’s ability to pay can be stemmed.

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The housing bubble, swollen by the "Non Recourse loans" and Smartass ARM financing, has yielded a big foreclosure inventory upon its burst.

The Banks are sluggish in selling off the inventory, even more reluctant to foreclose on any more properties where the occupants have stopped paying their mortgage - because they are now underwater and cannot accept as fiction that 'buying a home can only increase their net worth over time, unlike buying a car'. The logical fear with the banks is that bringing too many units in the market together would cause another price tumble, and there would be more occupants, freshly underwater, stopping their payments and ready to walk out. Needless to add, the banks want to minimize their losses and trying to control how many units they bring out into the market for yard sale. The reversal of Mark to Market helps them avoid booking losses on delinquent property that they haven’t repossessed and resold.

When the speculative prices of homes suffered the overdue fall, the Economy tumbled with home equity financing, and the conventional wisdom was that “Nothing can recover unless prices of homes recover”. Not ringing true anymore. Stable work and income, with affordable payment towards home, medicines and taxes are the best drivers of economic activity and growth, rather than unreasonable, unstable housing valuations led “home equity” loans. The overall economy is recovering but the problem around housing itself still remains. The potential of a vicious home ownership downward spiral, and bankers’ strategy to face it, is leading to rotting homes and neighborhoods, itself a contributor, in smaller measure, to the price-shrink spiral the banks are trying to forestall. And there is an opportunity loss to the wider economy too. Foreclosed houses awaiting resale and those under delinquency do not beget any maintenance expenditures, or remodeling activities, or upgrade.

For the potential buyers, the problem is that the homes are still very expensive, and even with the low interest rates, the payments can still be onerous; while the low interest regime robs bigtime from the retirees that wish to park their waning years' money in safe places.
The blind faith that “the house can only gain in value” having evaporated, potential buyers do not wish to stretch themselves to make the mortgage payment, and be in a situation where one is always one job loss away from losing the home after having made excruciating monthly payments for years.

Therefore, a FRESH approach is needed to clear off the foreclosure inventory and the shadow inventory. It can, and should, be cleared off under a new paradigm of home buying.

A Deferred Ownership Option has to be thought of wrt purchase of a house from a Bank. Here the buyer makes affordable monthly payments for a house for say, a period of twenty years. At the end of the period, he gets the title transferred to him as Endowment. In this approach, the buyer gets a payment scheme that does not stretch him out, but also cannot capitalize on any interim appreciation in the value of the house. So you get only genuine home buyers biting at such a plan, not short run speculators. Further sweetener can be added to such a scheme by attaching a “surrender value” (that grows modestly with time) on the house after five years of successful monthly payments. So, in case the buyer loses a job or is saddled with medical expenses that drain his income, he can let go of the house and get a modest amount of “surrender value” that helps him cope better with his situation.

Disposing off of foreclosure inventory via such a mechanism automatically shrinks the supply shock of homes looking for a buyer under normal home buying. So, the vicious cycle of slide in home prices and additional foreclosures unrelated to people’s ability to pay can be stemmed.