How to fix the real estate mess: Wharton professor's view

Posted by: Lauren Young on December 12, 2008

In the current issue of BusinessWeek, I co-authored a story featuring four experts on how to fix the housing mess.

For space reasons, I couldn’t include my interview with Joseph Gyourko, professor of real estate and finance at the Wharton School of the University of Pennsylvania and co-author of a new book, Rethinking Federal Housing Policy: How to Make Housing Plentiful and Affordable (AEI)

Like the other experts, I asked him where the housing is headed, and whether the proposals will help stabilize the battered residential sector.

THE DANGER Gyourko thinks credit subsidies—including proposals to cut interest rates to 4.5% for new home buyers—are a terrible idea: “Anything that subsidizes demand through credit is dangerous at a time like this.”

WASHINGTON WISH LIST The only way the housing market will stabilize is if prices continue to fall, Gyourko says. That’s why he thinks it’s O.K. to let troubled homeowners default. He acknowledges that this draconian approach will put even more pressure on the precarious banking system.

The other potential fix he suggests: a write-down program. Say you own a home valued at $250,000 and have a $300,000 mortgage. Your lender lets you write down your mortgage to $180,000, so you have some equity in the property. Gyourko likes this option better than letting homeowners default, “but it’s wildly expensive because lenders get nailed.”

One way or another, he says, “banks are left with big losses, and the taxpayers—you and I—are going to have to make them whole.”

For more info on Gyourko’s book, here’s a link to it on AEI’s website.

Reader Comments

Terry Kuehn

December 15, 2008 11:54 AM

Bottom line, a free market system with supply and demand as the conductor and brakeman is the only way to fly.

Peter

December 18, 2008 4:07 PM

A proposals to cut interest rates to 4.5% for new home buyers is like Bernie Madoff scouring for more victims as was running out of money. The housing bubble was like a giant Ponzi scheme. During the housing bubble everybody who was looking to buy bought for fear of forever getting priced out of the market and because 'real estate is such a great investment and it never goes down'. Buyers were borrowed from the future. Now you either have no buyers or burned buyers.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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