More bad bailouts

Housing prices in Nevada have been falling like a rock – which is not surprising, since they previously rose like a rocket ship. Current homeowners, mortgage brokers and real-estate agents want to stop the falling home prices, and politicians are too eager to "help."

In reality, all these groups are pitting themselves against the young, the poor, and the thrifty - people who either couldn't afford the over-inflated home prices or were smart and frugal enough to wait to buy when they could afford it.

It is no stretch of the imagination to say that the bailout robs Peter to pay Paul. Or we could say it is Robin Hood in reverse – robbing the tax-paying poor to pay the government-favored rich. Any way you slice it, Nevada and the U.S. Government both are bilking non-home owners to pay home owners, lending institutions, investment companies and real-estate companies.

Harry Reid has already guaranteed Nevada $72 million to target abandoned and foreclosed homes, with $22 million for Clark County, $14.8 million for Las Vegas, $6.8 million for North Las Vegas and $3.2 million for Henderson.

To (attempt to) stop home prices from falling, there are several strategies the government can employ with this money.

  • 1) Destroy the homes. Yes, governments have actually employed this tactic in the past. Home prices are falling because they were over-priced and over-supplied. Fewer homes would mean fewer options for buyers, who would be forced to bid the price of homes back up.
  • 2) Buy the homes. The government can become the owner of the homes, taking them off the market. Again, the strategy is to give consumers fewer options so they bid the price back up.
  • 3) Give the money to would-be home buyers. Home prices are already falling and people are already buying, but apparently not enough to move prices to the level desired by the politically favored. Increasing the number of people in the market to buy homes would mean more people bidding up the price of homes. Of course, this approach – encouraging people to buy homes they cannot afford – was a big cause of this mess in the first place.

Destroying homes uses existing wealth to destroy existing wealth, and thus doubly wastes resources, for which an unfettered free market would find superior, optimal uses.  

If the government buys up the homes, then the homes sit there, enjoyed by no one and thus useless. The money employed in purchasing the homes would have to come either from more government debt or the Fed's virtual printing press. As in the previous case, this effectively makes everyone in society poorer, preventing the superior use of the wealth that is locked up in those homes.

Giving the money to people who can't afford homes also destroys wealth – by taking money away from sectors of the economy that would otherwise grow.  Those sectors would otherwise employ more people (thus reducing unemployment) and/or increase salaries (allowing those very people to buy foreclosed homes).

All strategies of government meddling keep home prices from falling, but only by destroying wealth and making Nevada's economy worse off. The best solution is to keep government out of it and let markets work. Home prices need to fall so that more people can buy homes they can actually afford, so that resources can move from the incompetent investors to the competent, and so that Nevada's economy offers a more stable base for future growth.

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