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The Housing Dilemma

Sep 9, 2010 • Demand, Supply, and Markets, Economic Debates, Financial Markets, Regulation • 142 Views    5 Comments

Is it time for shock therapy? Since the housing bubble popped, from tax credits to mortgage modification programs, government has tried to support housing prices. The goal was to provide support and diminish foreclosures until the market stabilized. With housing sales still sinking, some suggest a different solution: the market.

On the one hand…Enabling overextended homeowners to keep their homes has many benefits. Neighborhoods remain occupied and home values are sustained. Children remain in the same school, emotional dislocation is minimized, the court system is not overloaded, banks can keep securities that have a higher value.

On the other hand…Shock therapy would involve the efficiency of the market. Buyers would offer bids for houses. With so many homes for sale from banks that foreclosed and homeowners with unaffordable properties, prices would probably plummet. Buyers would be pleased and sellers would be distraught. Confidence would initially suffer. Eventually, though, prices would stabilize at a market chosen level. The balance between demand and supply would be restored.

Which solution do you prefer? Government assistance favors sellers/owners. The market would help buyers. Neither solution though, as discussed by Gretchen Morgenson is quite as simple as it sounds. And to further complicate the issue, here is another perspective.

The Economic Lesson

Please imagine a demand and supply graph with price the Y-axis, quantity the X-axis, a downward sloping demand curve, and an upward sloping supply curve. If government support were eliminated, then the supply curve would shift to the right because the number of sellers increases. As a result, supply crosses demand at a lower price. How low? No one knows.

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  • EmilyMiller

    I agree with Alex. The point she raises about the reluctant buyers troubled me too; however, I think it has to do with confidence. Buyers are not confident that they can, or will be able to afford these cheaper properties. I think that by providing assistance can help to instill some confidence back into American homeowners.

  • alhyatt2

    I agree with A.NDiaye 11 on this one. I think that implementing shock therapy at this point would produce the exact effect implied in the first half of the name – shock. The shock of the recession forced people to save more money instead of spending it, so introducing more shock can only make it worse.

  • LewisK

    While I can understand the previous two responses I don’t think either of the options will hurt the market that much. I think that we should combine the two ideas by giving more of a grace period before a foreclosure. I think giving people jobs to pay their mortgages will help more than giving them time to pay them.

  • A.NDiaye11

    Right now, all we can do is hope that the market gets better, but instilling Shock therapy would cause even more havoc. There is no reassurance in that plan. With so many houses either in foreclosure or on the market, houses that are not for sale are seeing the affects as well. The longer those houses stay on the market, the more neighborhood values fall. The question that the government needs to answer is, why are buyers so reluctant to buy? If houses are being sold at a much lower rate, then why aren’t they buying? Right now, I think it is best for overextended homeowners to keep their houses and offer them assistance .

  • elizabeth.y

    At this point in the housing market, it seems necessary to support the sellers/owners. Shock therapy would ensue less confidence in the market which is something that we are not up for. Some owners are deciding to sell their houses without paying off their mortgages. These owners are forced to do this because they have no other option but to sell. They also feel that this move will help them out in the long run. This is the reason why I believe we need a quicker solution. If the government tries to keep overextended owners in their houses, there will be less urgency and panic in the market because there will not be many buyers. In order to fix the real estate market, we need to help instill confidence. I feel that the only way to do this now is to keep owners comfortable and relaxed. Forcing sellers to sell their house at an unreasonably low price is not going to beneficial soon enough.

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