Ellickson’s analysis suggests that this is just about the worst of all possible policy responses. By drawing out the foreclosure process, these moratoria increase the time during which homes are no-man’s-land. During such periods, homes and neighborhoods depreciate. A better policy would move the home quickly, either back into the hands of the owner with a new, more realistic mortgage, or into the hands of a new owner that can afford the house.
Given how often the existing owner defaults again on the “realistic” mortgage, I vote for the new owner. Also, I would say that the drawing out the process of shutting down insolvent banks has exactly the same problems. During the period of uncertainty, the value of the bank plummets, for a variety of reasons.
I get the sense that cutting losses and shutting down bad projects is one of the most psychologically difficult things to do. One of the things that recessions do is that they give people permission to shut down bad investments. Thus,, Home Depot is shutting down its “Home Expo” unit now. It was always a flop, and they could have shut it down at any point, but now they are willing to do it. The Post Office should have been cutting costs years ago, but now they think they might be able to do it. And so on.
Glaeser writes,
To reduce the human suffering of speedy evictions, the government could give people who lose their homes a lump sum payment, perhaps $5,000, a relatively modest sum that would help at least to offset the costs of moving and finding a rental unit.
I’ve been saying that for months.
The connection between homeownership and structure type implies that when the federal government gets into the business of supporting homeownership, it also gets into the business of supporting single-family detached homes–and this means supporting lower-density living. New Yorkers have converted plenty of rental units into co-ops, but still 77 percent of the households in Manhattan rent. The government’s big post-war push into homeownership was inevitably also a push to suburbanize. You do not need to be an enemy of the suburbs to wonder why the government is implicitly urging Americans to drive longer distances and flee denser living.
His bottom line: get rid of subsidies to mortgages and home ownership; instead, promote housing affordability by loosening land use regulation.
READER COMMENTS
tom
Feb 2 2009 at 10:55am
“Also, I would say that the drawing out the process of shutting down insolvent banks has exactly the same problems. During the period of uncertainty, the value of the bank plummets, for a variety of reasons.”
Hmmm, I don’t want to be a nit here but the reasons a home declines in value during foreclosure are different from reasons that a business loses value during bankruptcy. For the house its largely a physical structure, without a properly motivated inhabitant there is no one to identify and fix leaks or broken windows, keep animals and squatters out. We are not just talking about the psychological devaluation we are talking actual damage.
If a bank is placed in receivership its not cleared out and left to rot. Any lowering of value of their assets is much closer to a zero sum game as they provide a bargain for those purchasing.
Steve Sailer
Feb 2 2009 at 3:17pm
There are soon going to be a lot of affluent retired Baby Boomers from the north who might want to take up the snow bird lifestyle of spending November thru April in an overbuilt exurb in California, Arizona, Nevada, or Florida, then returning home for the summer. (They would need to hire a service to come by their houses in the summer periodically to check for trouble, but that’s easily arranged.) The main thing they need for this to happen is prices in Foreclosure Land to fall low enough that it makes sense for them to buy. Stalling foreclosures won’t do it.
Alex
Feb 3 2009 at 12:02am
Arnold,
It seems that for many politicians and bureaucrats, at least at the local level, more homeownership translates directly into better entrenchment, since it makes it harder for people to vote with their feet and escape local “services”. It would be interesting to see your comments on this thought in a future post. Thanks.
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