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The Housing Dilemma

by Elaine Schwartz    •    Sep 9, 2010

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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