What Does the Bailout Mean for Homeowners?
You have to love those New Yorker cartoons. The kid breaks open his piggy bank and says "Now we just have to sit back and wait for the Fed to bail us out."
Yes, the big bailout is upon us. Compromises will be made. The money will get paid in stages. There will be limits on executive pay. The government will get some equity in the troubled firms that participate.
Big banks will get to unload their worst loans on us taxpayers. Stock prices will recover. Credit will flow again. But what does this really mean for home owners?
Some have suggested that the wave of foreclosures will end. Housing prices will bottom out. Don't bet on it. A little historical perspective is warranted.
A previous Bush president—I’m not trying to infer anything here—created a similar government bailout mechanism in 1989. The Resolution Trust Corp. was in business for six years. Some $300 billion worth of bank assets were taken over. Tens of thousands of distressed properties were sold. It took years to work these through the system. It wasn’t until about 1995 that housing prices in the U.S. bottomed out.
Homeowners are in for a long, bumpy ride. That’s what history tells us.
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