Start at square one, How did we get here? By here I mean housing prices above historic norms and many underwater homeowners. From a government point of view, We got here by lax regulation (Federal Reserve is very guilty here), loose monetary policy (Federal Reserve again), political will to back the “American dream” (I call it a cultural blind spot). The lax regulation and loose monetary policy combined with the private markets “it’s different this time” securitization to create almost unlimited credit. Joe Six-Pack was given any amount of money they wanted, all they had to do was ask.

Where are most people most likely to ask for large amounts of credit? Homeownership. Anyone and everyone could then buy a home. Not being financially savvy and definitely not understanding that a bank will in fact give you a loan you have no chance of paying back people jumped in and bought their “American Dream”. So we have a large swath of the populous who could never hope to buy a home now able to buy a home. With such a static/illiquid market such as housing this caused prices to rise very fast and new buyers to take on even more debt. Homebuilders responded by building homes anywhere and everywhere and people responded by grabbing whatever they could wherever they could.

This cycle went on for so long that we have many far flung communities that were basically based on this hyper growth. The houses are in the wrong place, far from job centers. The local jobs aren’t manufacturing or professional services, they are consumer related / retail and real estate related. As the housing bubble popped these communities are no longer viable, they never were. Just like many of the people purchasing homes, they were never viable home ownership candidates. Continuing to keep them overpaying on homes relative to market ensures they have no discretionary spending elsewhere and is a continued drag on the economy. We keep them in “their” homes and the economy gets worse because we haven’t solved anything.

Foreclosures, Short sales are viable solutions. You give the person a choice, you get the home and the debt or no home and no debt. A hard choice must be made. And people will make the best choice for their families. The problem with loan modifications is that they are “too easy”, the homeowner doesn’t have a hard choice to make. They see other people getting a sweetheart deal by making a few calls and not paying their mortgage and they do it too. It’s the easiest choice of the “hard” choices. So the banks can’t give away “too good” of loan modifications since they are too easy to get. That means loan modifications “won’t work” as a mass solution.

So now we come to the proposal of buying homes in the depressed areas. These areas are the areas where the homes are literally in the wrong spot. The jobs are elsewhere, the things that make a long term community viable are elsewhere or can’t be supported by the local populous. You’d be spending a lot of money for little benefit. We see in places where there are jobs and/or a large supply of renters that the housing market is booming in the “affordable” price ranges. California housing supply is at 3.8 months! That is getting to bubble territory. The problem with California is that the there are too few homes not too many. The underwater homeowners who can’t afford their homes can and should be replaced with a borrower who can afford the home. The greatest economic benefit to banks (least loss) and to the economy would be to liquidate the weak borrower and replace them with a strong one. Clearly this “buy homes” solution isn’t one for California. So where then, Ohio? Manufacturing base being destroyed, the jobs are gone so the houses are in the wrong place. Michigan, ditto. Florida? You just have massive overbuilding and speculation. So buy up the houses in Florida and Ohio (and those type places) and raze them, don’t rent them out, that doesn’t solve a thing. But it is an extremely expensive proposition, You get into the issue of where to buy and what price to pay. It is just a giveaway of money to the banks.

The best choice continues to be short sales and foreclosure. Loan modification have a limited place, it is much more likely a kick the can solution than an actual solution. The actual “solution” to housing woes is unfortunately a slow one. It is all about jobs. Good jobs, stable jobs. Because of the credit bubble we have far too many construction workers, mortgage brokers, real estate agents, and financial types. We have far too few engineers and scientists. We need ideas, knowledge and hard work. Not people building houses to sell and flip to each other. Unfortunately a large part of our economy is still based on that. Supporting that part of the economy is just holding on to the idea that those days were rational instead of calling it a bubble and looking for ways of promoting organic growth. Housing is fundamentally broken because the economy is fundamentally broken. Fix the economy and housing takes care of itself.