When the housing bubble collapsed, many speculators who owned the mortgages or related financial instruments refused to sell them at market value.
The speculators said that the market value was an “accounting fiction,” and if only the house sat unempty for months or years on end, it would become valuable again.
The speculators refused to sell the house to someone who would care for it, out of their financial self-interest, and in many cases the houses were subsequently destroyed.
Calculated Risk: Report: One-Third of REOs Seriously Damaged
Popik says responses from thousands of real estate agents nationwide to the questionnaires he sends out quarterly indicate that badly damaged foreclosed homes … are a much bigger element of the national housing picture than officials in Washington have acknowledged.
“In many cases, it costs so much to rehabilitate these houses, it’s just not cost-effective,” he told CNN. “And the properties are eventually going to be bulldozed.”
Whenever speculators complain about “toxic assets,” they are angered that the goods they purchased are now worth less because (a) they purchased them in a bubble and (b) they have not maintained them.
The definition of a “toxic asset” is (a) something worth less than it once was that is (b) owned by someone politically powerful.
Now, not all economists buy this argument. They say that the psychology of the current bust is different from what it was in Boston in the early 1990s. In a handful of metropolitan areas, including Phoenix, prices have fallen almost 50 percent from their 2006 peak.
Homeowners in such places may wonder if their houses will ever be worth more than their mortgages. So fairly small changes in their lives â€” like a reduction in work hours or the breakdown of a car â€” may lead them to walk away from their homes.
“I would not minimize that risk at all,” said Frederic Mishkin, a member of the Fed’s board of governors until last year.
If even 10 percent of the underwater homeowners walked away, Mishkin notes, foreclosures would soar, exacerbating the economy’s many problems.
Other economists who share his view are calling for across-the-board programs that would reduce interest rates or otherwise juice the housing market. They are worried that without bolder government actions, the housing market will continue to spiral downward.
In the end, the choice between the two approaches becomes a matter of cost-benefit analysis. The more aggressive approach would almost certainly do more to reduce foreclosures. But it would also be enormously more expensive.
If the economists from the Boston Fed are right â€” or even close to right â€” then the aggressive approach may cost something like $500 billion to prevent 500,000 foreclosures.
That’s $1 million per prevented foreclosure. Is that really worth it? Or could the money be better spent in other ways? (There is also the small matter of whether Congress would be willing to spend another $500 billion anytime soon.)