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Sunday, June 24, 2012

"Reviving Real Estate Requires Collective Action"

Robert Shiller:

Reviving Real Estate Requires Collective Action, by Robert Shiller, Commentary, NY Times: Imagine that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.
This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest. ...
If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy. ...

He goes on to suggest several solutions to this problem.

    Posted by on Sunday, June 24, 2012 at 02:34 AM in Economics, Housing, Market Failure | Permalink  Comments (52)


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