Financial Crisis

Here is an excerpt from a blog I read this week about the financial crisis.

The Financial Crisis: Bad and Getting Worse, but Put Away that D-word

Published: January 21, 2009 in Knowledge@Wharton

Too Many Homes

“I think [foreclosures are] a very important problem, but I think it’s being worked out by the private sector,” Siegel says. The root problem, according to Siegel: There are too many homes and too many were bought at inflated prices. “The price of homes has to fall. There’s no way to stop that from happening.”

Blume, too, doubts the government can effectively stop the wave of foreclosures. With the economy worsening and unemployment rising, fewer and fewer people can afford the homes they have, and many potential buyers lured by bargain prices can’t find banks to give them mortgages. “I have not yet seen a plan to help reduce foreclosures that gets to … the problem … that people bought houses they could not afford. If you reduce the interest rate a little bit, they still can’t afford them.”

He concludes that there may be no alternative but to let the housing market adjust on its own. “Ultimately, all these houses will be off the market,” Blume says. “Somebody will buy them and then the market will stabilize.”

But there’s no telling, he adds, how long that will take, or how far home prices will have to fall.


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