How to Fix the Housing Market: Forced Foreclosures

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H.L. Mencken famously wrote that there is a solution to every human problem that is neat, plausible, and wrong. I have a solution to the housing crisis that is neat. I think it is plausible, and I suppose, but only inductively, that it is wrong. But since I cannot figure out why it's wrong, I'll leave that part of the exercise to readers.

I propose that Uncle Sam condemn defaulted homes (including condos) in high-foreclosure areas as potential hazards, or to save the financial system, or under whatever pretext works constitutionally, and auction them off to the highest bidder free of their existing mortgages, which would also be condemned. I would think that potential landlords would be happy to buy up these places and turn them into rental housing. I mean, they're nice houses, right? Just overpriced.

The proceeds of the auctions would be paid to the lenders as compensation for the taking of the mortgages. Presumably, the homes' "owners" have no equity, so no compenstion would be due them. The lenders would have to recognize their losses, but Uncle Sam can throw money at that problem, if it is a problem. My object is to cut the Gordian knot of tranche-holders arguing over whether to foreclose or for how much to sell the foreclosed property. The condemnation process takes care of that. How the falling chips are allowed to fall is a separate question, one that needs to be answered, but not one that makes the condemnation approach unworkable.

What drives this proposal is my unease with the idea of these houses standing empty while people live in substandard junk at the other end of the rental inventory. These new homes are here. If some part of our housing stock has to go, why not the worst of it?

I'm not proposing that the government decide who gets to live where. I'm proposing only that the new inventory be added to the inventory and the market sort out who lives where at what price. Just because this inventory shouldn't have been built does not mean that its destruction or disuse is the best solution to the oversupply. LIFO inventory destruction seems arbitrary and, therefore, wasteful. Why can't we do better?

This suggestion nibbles at a broader problem that I have been developing in various comments to others' articles. I view the willingness of workers elsewhere - Asia, say - to work for less than our workers as a sort of "gift" to America, irrespective of whether they demand exports in return. Cheap work is cheap work, however it is paid for. Ditto, the willingness of a nation to overvalue our currency to the extent such overvaluation makes imports frrom that country even cheaper than the cheap labor allows. Yes, currency manipulation also reduces our exports, but that just means that the manipulating country doesn't want anything in return for what it sells us. Isn't that another win for us?

Free traders seem conflicted on this point. They like cheap foreign wages because they make things cheap here while "freeing up" our workers to do something else, but they hate currency manipulation, which has precisely the same effect, The difference appears to be that making things for export is the "something else" that cheap imports are supposed to free our workers up to do. But why is that so?

My housing suggestion treats our trading partners' willingness to lend us money at bargain rates, or with inadequate underwriting, as another "gift" to America. The underwriting issue, however, is philosophically thorny because own chicanery is implicated in the process. The economics, however, are the same: we get a bargain. To the extent we can attribute that bargain to something other than American misconduct, we ought to be able to share it. The rest, frankly, we should find a way to give back, and the bail-outs of the financial system may, in fact, be viewed more charitably through that prism.

We have not been able so far to figure out how to share the gift of cheap labor and overvalued currency. They translate into lower prices for all American consumers. That part is easy. But these great prices put American manufacturing workers out of work, at least until they can find something else to do. Free trade advocates assume, or infer from history, that there will be something else to do, at least to the extent of the cheap labor gift. I'm not so sanguine. I just don't see it happening, Even with export subsidies to reverse the ille effects of currency manipulation, I don't think we can all get back to work. That's why tariffs to keep out cheap imports may be necessary even if they are uneconomic. We may, for purposes of preserving domestic tranquility, have to protect our jobs more than we need to get things cheaply. But that's for another day. Today, I just want to fix the housing mess.

Disclosure: No positions.