A rhumbline is a direct heading to a point. On a map it's a straight line. It looks like the perfect way to get where you're going. On a globe, though, it may be the long way around. For example, New York and Madrid are about the same latitude. On a map, a course due east from New York is the shortest distance to Madrid. On the round face of the earth, though, a curved path (called the great circle route) passing over Greenland and the northern Atlantic is shorter. Try it with a string and a globe if you don't believe it. That's probably what a lot of the comments on this blog will be like. Random? Disconnected? Circular? Probably. But maybe they will lead to a point eventually.



Tuesday, November 8, 2011

Foreclosures Are The Answer, Not The Problem

At least weekly I read about the latest attempts to stop foreclosures.  Every one of these plans is well-intentioned but every one harms the economy.  The biggest housing problem in our economy is underwater homeowners, not those being foreclosed.  Estimates say that over 28% of homeowners owe more on their mortgage than their house is worth.  Diana Olick has an article on the CNBC website that uses the term "effectively underwater."  In order to sell a home, pay a 6% realtor commission, and have a 20% downpayment on a new home, your house has to be worth nearly 30% more than you owe.  Her article says fewer than half of all homeowners have this much equity.

That means that over half of all homeowners are stuck in their current homes.  They can't sell it and buy a bigger house when the new baby comes.  They can't move to take advantage of that great job opportunity in Dallas.  This kind of mobility is what normally fuels the housing market.

The largest factor holding home prices down in many areas is the overhang of foreclosures constantly dribbling onto the market.  Prices will not start rising again until these homes have sold at a market-clearing prices, many probably to investors who will rent them out.  This can't happen as long as lawsuits and federal programs keep delaying the process.  As painful as it is, more and faster foreclosures is the only way out of this mess.
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