Is The Obama Administration Trying To Push Down Home Prices?

I don’t really believe that the Obaman administration is really intentionally trying to push down home prices but this could end up being the unintended consequence of their recent proposal to settle the foreclosure process complaints. And you heard it here first. At least I haven’t heard anyone else discuss this yet.

Here is the background story and my logic. The Wall Street Journal reported yesterday that the Obama administration is proposing that the nation’s largest banks (presumably those found to be short circuiting the foreclosure process) fund up to $20 B in principal reductions for underwater homeowners. Never mind that this is nothing more than an expensive wealth transfer from the banks to homeowners. Never mind that the end result of proper foreclosures would probably have been the same (OK I don’t know that for a fact but I challenge anyone to prove otherwise).

So let’s assume that a bunch of homeowners get their principal balance reduced so that they are no longer underwater on their mortgage. Well, I believe that one of the few things preventing home prices from declining further is the fact that many underwater homeowners can’t afford to sell their homes right now. They can’t bring money to closing or they won’t have any equity to use towards a down payment on their next home and they don’t want to do a short sale. So they stay put, learning to want what they have. I know this for a fact, having discussed options with many would-be sellers. And I believe that this is propping up home prices.

But if suddenly these homeowners are no longer underwater what will be the first thing they will do? I think the answer is obvious: sell their homes. So suddenly you will have hundreds of thousands of homeoners ready to sell at much lower prices than they would have the day before the government got involved. This can’t be good for prices, though it will probably be great for the real estate business – more transaction volume.