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For the past eighteen months, Barack Obama’s administration in Washington, DC has been chiseling away at America’s property woes with limited success. This week they announced yet another initiative, which skeptical pundits say is equally unlikely to be more effective. They say this because they believe that the economic forces are simply too powerful to be turned back by fiddling at the top level of the problem, while demand for real estate remains depressed by unemployment.

The advocates of laissez fair (the doctrine that governments should not interfere in commercial matters) have been claiming moral high ground recently, pointing out that they previously advised allowing the market to bottom out naturally. Their political opponents point out that the dangers of allowing a market to undershoot are as serious as letting it overshoot (and many Americans know all about that from bitter experience).

To date there has been no undershoot. True, prices are way down from three years ago. However, those were overshot prices, and overall medians are still above historic norms in terms of relation to income. Hence, they need to fall more until we reach the tipping point of confidence. Then, and then only will the real estate market turn.

This is not to say that we should not do everything possible to prevent foreclosures. This is especially important because of the wider shockwaves that they cause. The main difficulties are the purely practical issues behind attempts to modify securitized mortgages.

The latest federal initiative focuses on the practice of strategic default. This is where underwater borrowers in good standing choose to walk away from their homes because they are worth so little compared to what they owe. In terms of this initiative, owners of mortgage securities may put loans in good standard forward for re-financing under public guarantee, provided there is loan write-down of at least 10%. Main technical difficulties appear to be rules for eligibility, and challenges of co-coordinating the macro effort.

Washington appears to have lost energy for more imaginative efforts. This is a pity. Perhaps the looming mid-term elections have given them cold feet. The most successful initiative to date has been tax credits. Proof positive is the plunge in prices when these expired.

Supporters of laissez faire are at pains to point out that we should not repeat these credits. They say that the Dodd-Frank reforms and improved bank balance sheets negate fears of a further fall in house prices, and that we should wait patiently until supply and demand find a new balance. The foreclosure prevention program should continue, provided we do not over-estimate what it is likely to achieve.

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