Many blogs and articles dealing with the foreclosure crisis advocate that the government should act to prevent a further decline in property values. To the contrary, I think the government should let property values continue their decline so that nonprofit community housing organizations such as Habitat can afford to purchase foreclosed properties, and provide the community housing organizations with grants or low-interest loans to purchase the properties and convert them to affordable housing, whether that be in the form of condos, apartments, or multi-family houses. Robert Shiller, Yale finance professor and author of Irrational Exuberance, a book about asset bubbles, appears to share this viewpoint. In a February 19, 2008 article by Karen Jacobs in Reuters entitled "Habitat says affordability gap persists", Professor Shiller is quoted as saying: "Most of us care about our children and grandchildren, and these people have to buy houses, so why would we want high home prices? We want economic growth, we don't want high home prices."
From the perspective of youth and millions of poor and lower-middle-class families, home prices soared far beyond the affordability level. Home ownership for these people could only be achieved through a number of gimmicks, including co-signers, no income documentation, no down payment, interest-only loans, and so on. Even as home prices continue to sink, homes and apartments in many parts of the country are still unaffordable for the majority of the local population .
As real estate values increased during the boom, so too did rents. Rental housing has long been a cottage industry for small investors, giving them a steady income and a means to retire. But to produce income for the investor, rents must at least cover the ownership costs, and the higher the mortgage, the higher the rents. So, in addition to not being able to afford a house, many people have been priced out of the rental market as well. The stories about people not being able to live close enough to their jobs to commute are legion.
Somewhat paradoxically, plummeting real estate prices are forcing rents higher because of the pressure on the rental market caused by folks leaving their foreclosed houses. And because refinancing has become so difficult, investor/landlords have not been able to reduce their mortgages to the value of their properties -- so they could lower the rents they charge.
There are many suggestions floating around for how the government and housing finance industry should react to the foreclosure crisis. These suggestions range from 1) adjusting the bankruptcy laws to allow modifications of mortgage debt, 2) preventing foreclosures by providing people or communities with low-interest loans, and 3) helping homeowners modify their payments to deal with their arrearages.
For obvious reasons -- tax receipts and profits among them -- local governments and the housing finance industry want to prop up real estate values by any means necessary. And this, of course, is fine with existing homeowners. The higher the real estate values, the better their bottom line will be. As you know from my opening lines, however, I believe prices ought to go in the opposite direction. While I'm all for preventing foreclosures, they are going to happen anyway, in large numbers. Why not take advantage of this opportunity to increase the stock of affordable housing?
Letting property values slide and shoveling money to nonprofit community housing groups will help to reduce the imbalance in affordable housing that the boom in property values caused to happen in the first place. As an important side effect, a policy that will encourage the creation of affordable housing will help prevent the blight caused by thousands of vacant houses resulting from the foreclosure crisis. Finally, a massive conversion of single-family dwellings into affordable dwelling units will stimulate employment opportunities for the thousands of contractors who now are suffering right along with the rest of the real estate industry.