Housing finance: For once, please leave it alone
The housing sector is not well. Politicians to the rescue?

Darren Wamboldt/Bergman Group

Article Highlights

  • Write-downs save homeowners from defaulting on loans & save the lender the losses associated with foreclosing on a home

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  • This is a clear instance in which policy makers should resist the urge to “fix” the problem

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  • Government intervention should be reserved for market failures, and this is not one

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The housing sector of our economy continues to struggle by virtually any metric. The Standard & Poor’s/Case-Shiller home price index is down 4 percent from where it was in April 2010, and 33 percent from its peak. New housing starts in May were 3.4 percent below the May 2010 rate. And 23.1 percent of homeowners are “underwater”—they owe more to the bank than the value of their home, an estimated $750 billion more than their homes are worth.

When confronted with a problem such as the one currently playing out in the housing market, policy makers are by nature oriented toward identifying and implementing a solution. In this case, if politicians could craft a solution that would save the millions of affected homeowners and help right the economy, they could claim a political victory heading into an important election, while homeowners, builders, and lenders would all be relieved of a massive financial burden.

If only such a solution existed.

Alex Brill is a research fellow at AEI.

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