We need home equity insurance now

Marketplace Staff Apr 16, 2009
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We need home equity insurance now

Marketplace Staff Apr 16, 2009
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TEXT OF STORY

Kai Ryssdal: For all the promise the banks seem to be showing, housing is still playing catch up. The company that watches foreclosure numbers — RealtyTrac — reported this morning filings last month were up 46 percent over March a year ago. Today the Obama administration named the first six lenders that are going to participate in a $75 billion foreclosure-relief program. But commentator and economist Barry Nalebuff says there is a cheaper way to turn things around.


BARRY NALEBUFF: The housing market is in a vicious cycle of scared buyers, foreclosures and falling prices. In a normal world, falling prices increases demand and reduces supply. But today’s housing market is far from normal. As prices fall, demand falls with it. People are afraid prices will far further, so they hold back. No one wants to catch a falling knife. Paradoxically, falling prices also lead to increased supply, due to defaults, distressed sales, and foreclosures.

One way to break this downward cycle is to offer home buyers protection against losing money on their homes. 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.

That’s why we need this type of insurance now and on a big scale. What we need is a federal home equity insurance program. How would it work? If prices fall, you’re covered. The insurance would be linked to the overall house price index at a local level, not the price your home. That way, you can’t sell at a loss just because you didn’t maintain the house. Lenders would also be protected, with first claim on any payment from the policy. Protecting lenders should make them more willing to provide loans and help bring some leverage back into the mortgage market.

Unlike other bailout programs, providing home equity insurance won’t cost taxpayers billions. Here’s why. Having insurance available changes the whole market psychology. The very existence of the insurance increases demand which reduces the risk that prices will fall. This makes the insurance cheap to provide. Indeed, if the increased demand just stabilizes prices, there won’t be any claims and the cost of providing the insurance will be free.

Can it be done? Yes. Six years ago, my colleagues and I worked with HUD and Neighborhood Works to develop just such a product for Syracuse. After nearly a decade of declining prices, this product helped turn the market around.

What works for Syracuse is good, even essential, for America.

Barry Nalebuff is a professor of business strategy at the Yale School of Management.

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