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Can Bailout In 'Billions' Shore Up Home Prices?

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By ALAN ZIBEL

The Associated Press

Published: September 20, 2008

WASHINGTON - Home prices. That's what the Bush administration's historic Wall Street bailout is really about.

Falling home prices nationwide have acted like dominoes, knocking homeowners into foreclosure and taking down lender after lender, until the entire global financial system was in jeopardy.

Experts say that the government's enormous plan to relieve Wall Street banks of their bad investments has a decent chance of stabilizing home prices, at least in theory. If that happens, it will stop Wall Street's bleeding, but could still keep many families locked out of the housing market.

And few markets need relief more than Florida's battered real estate industry. Foreclosure filings in the state are skyrocketing, homes are taking months to sell and sales prices are tumbling.

By buying troubled mortgage debt from major banks, the government can help make more money available to borrowers - and maybe at lower interest rates. The government also will have more power to modify delinquent loans and keep homeowners out of foreclosure.

"If the government - as the mega-investor - can speak with one voice ... there can be big changes in the rate of foreclosures," said Alan White, a law professor at Valparaiso University and a longtime consumer attorney.

The downside, however, is that in areas such as California and Florida, where prices soared and are now falling precipitously, homes in many cities remain unaffordable for many families - even well-paid professionals.

In Florida, there were 44,000 properties in August with default notices, auction sale notices and bank repossessions. That was the second-highest among all states. The foreclosure properties are further clogging the pipeline of homes listed for sale and dragging down prices. Sales prices in the Tampa metro area fell 18 percent to a median price of $176,500 in July, the last month reported by the Florida Association of Realtors. The median price was $215,600 in July 2007 and $239,600 in June 2006, when prices peaked locally. In addition, there are more than 31,000 vacant lots scattered throughout the area, and experts estimate it could take more than five years for builders to work off all the inventory of finished homes and lots.

The market conditions have put many families' lives on hold. For example, Paul Castor, a corporate attorney, is reluctant to buy a home for his family in San Diego at current prices.

He has a down payment of more than 20 percent and has made two offers in recent weeks, but the sellers' asking prices "were unrealistic and I wasn't going to budge."

If nobody accepts his offer, Castor is more than willing to keep renting and hope home prices fall further.

"The root cause of the problem is that we don't have any home buyers," said Edward Leamer, an economist at the University of California, Los Angeles. "They're going to sit on the sidelines - by and large - until they get a better deal."

Rather than reward Wall Street investors for making bad decisions and exposing taxpayers to hundreds of billions in losses, Leamer said the government should be providing incentives for first-time home buyers.

Even if the government's plans succeed, experts don't foresee a dramatic recovery in home prices anytime soon.

"When housing rebounds, it will not do so with the kind of speed and activity that we have seen in the last couple of years when the housing market was strong," said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, N.J.

After having been burned by skyrocketing loan defaults, banks are "going to be to be very reluctant to issue any kind of risky mortgage," he said.

Treasury Secretary Henry Paulson gave few details of the government's plan in a news conference Friday morning, but said he would work through the weekend with leaders of Congress from both parties to flesh out the program.

Paulson said that the bailout would cost "hundreds of billions."

The Treasury secretary also said mortgage giants Fannie Mae and Freddie Mac - taken over by the government this month - will step up their purchases of mortgage-backed securities to provide support to the crippled housing market.

Tribune reporter Shannon Behnken contributed to this report.

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