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March 23rd, 2009 9:03 AM by David W. Welch
Last fall banks were bailed out, and what did they do? They slashed the prices on their foreclosed properties. This cause a surge in real estate sales, but drove prices down. More money has been poured into shoring up the banks balance sheets to stimulate lending. That is not the result so far. In fact, banks have continually tightened credit terms making it more difficult for even good borrowers to get credit. Tighter credit, albeit at lower interest rates, and the banks slashing REO prices have kept the sales up. Is it really helping the real estate market or the economy to keep pressuring homeowner equity lower and lower. I have read estimates that up to 20% of homeowners are now into negative equity positions. This is a direct result of the bank bailouts. The focus has been solely on the demand side of the equation creating a downward spiral in the economy.
Banks cut the REO prices, values drop, equity drops, homeowners feel more pressured to sell. The loss of homeowner equity has more to do with the economy than you think. It not only effects short sales and foreclosures, but consumer spending. I remember a report by Alan Greenspan a few years ago that for every $10,000 in homeowner equity we spend an extra $1,000 per year. Well values here in Orlando have dropped about $120,000 from the peak which should translate into $12,000 less per year in consumer spending. I don't know that those spending numbers hold true with such a drastic drop, but I think everyone can agree that consumer spending has been down along with consumer confidence.
If the treasury really wants to make an impact for a lot less money, just buy up all the bank REO's. Take one million homes off the market. That would stabilize the real estate market, pump billions into the banks and wipe out the mortgages that are already foreclosed. The banks don't have to waste so many resources which are already inefficiently handling the situation. By taking the homes off the market real estate would return to a balanced market stopping the freefall in prices. Homeowners will regain some confidence, which might actually result in more homes coming off the market. If prices stop going down, I believe we would actually see a drop in the number of short sales on the market. This would further free up banks from another money losing inefficient process. They might actuallly be able to put their resources back to work making loans and getting them closed. It frees up the whole system that is currently being clogged by REO's and short sales. The tri-county area around Orlando currently has over 5,000 pending sales that are slow to get closed because of the bank owned properties and short sales pending bank approval.
The best part is that $300 billion should pick up a million properties and still have money left over to cover carrying costs on the properties for up to two years. The government would be making an investment not a bail out. The money would be recouped over the next couple of years as the properties are resold as they can be reabsorbed into the market. The newest plan that is coming out of the Treasury Department is looking to spend up to $100 billion to try to get private investors to purchase up to another $500 billion in "toxic assets". Estimates say it could go to $1 trillion, and much of the risk comes back on the government if it does not work. All of the current bailout help investors not homeowners. My plan helps every homeowner at a fraction of the cost.
David Welch, Real Estate Optimist