Thursday, June 17, 2010

Americans - Homeowners or Homeowned?

David Wessel wrote a great article in today's Wall Street Journal titled Rethinking the American Dream. The gist of the article is that the U.S. really needs to rethink its core policies regarding homeownership. The subsidies inherent in the mortgage deduction and the loan guarantee agencies and the securitizers Fannie Mae and Freddy Mac have made a positive impact toward the government goal of increasing home ownership, but in doing so, they may have created markets subject to bust cycles that have huge impacts on the economy. Secondly, in times like today with negative home equity, the benefits of home ownership (the justification for the subsidies) are largely nonexistent.

The article has a great graph that I hope will post here. It shows the peak homeownership % for several US cities, the current homeownership percentage, and the percentage of the owners with positive home equity. There are regional crises illuminated by these numbers. For example, Las Vegas, Nevada has a 15% positive home equity rate, that's roughly 1/3 of the rate in Detroit, a city that many would consider to be blighted.

(Graph via

A couple of years ago, I was among those who were advocating legislation allowing the cram down of negative equity in a chapter 13 bankruptcy. That would have been a great idea at that time. I think it would have been a lot better than the HAMP nonsense we have now. I don't know how you could realistically expect to allow cramdowns now. What would happen if 85% of Las Vegas homeowners filed for bankruptcy, or even half that? The window might be closed, and it's a shame. The negative equity is a millstone around the neck of Americans and the American economy and will be for years to come. People can't move to find new jobs, because they can't sell their houses. If you take the hit and abandon your house, then the poor credit that follows you keeps you from being a full participant in the economy for years afterwards.

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