The current economic crisis, most experts agree, was triggered by a collapse of the housing sector. To help turn the economy around, it makes sense to boost that portion of the economy, while remaining cautious so as to avoid making the same mistakes that led to people earning $30,000 buying $300,000 houses.
The Bush and Obama administrations focused on shoring up banks because they provide financing for home mortgages and businesses. But the time has come to nudge consumers to begin buying again. The Obama team has taken steps to help those struggling to pay their mortgages, but more can be done to warm up the housing market.
One plan, proposed by economist and Yale School of Management business professor Barry Nalebuff would have the federal government offer home buyers a kind of home equity insurance. A policy would protect them from a house losing value after purchase. It would be a less expensive program than other federal incentives, Mr. Nalebuff argues.
“In a normal world, falling prices increase demand and reduce supply. But today’s housing market is far from normal. As prices fall, demand falls with it. People are afraid prices will fall further, so they hold back,” he said in a recent radio interview. “People buy insurance to protect against floods and fire. But they can’t protect themselves from losing all their home equity in a declining market. With such insurance in place, many more people would be willing to buy in this declining market and thereby turn the market around.”
It’s an intriguing idea. And there are others, such as offering more tax credits for buying a foreclosed homes, and expanding existing first-time home buyer incentives.
So much of the economy hinges on Americans owning their homes. Reaping the benefits of increased home ownership are furniture stores, hardware stores, lumber yards, do-it-yourself building supply big-box stores, plumbers, electricians, landscapers, painters, roofers and carpenters. Not coincidentally, state government relies heavily on sales tax revenue from building supplies and related activities, which is another reason the housing market should be goosed into motion.
In Maine, where land is relatively inexpensive, a government incentive program might be created to push banks to partner with home building businesses. Many contractors made a lot of money in the last 10 years building so-called trophy homes for wealthy out-of-state retirees or renovating old Victorians. But we all would benefit from having these builders constructing more modest starter homes. If a young couple is able to afford a home, they are more likely to start a family, get involved in their community and local school, and boost the local economy.
A sad outcome of the current recession would be a long-lasting blight on the value of home ownership.