Seized by the Wrong Strategy: Using eminent domain to fix bad mortgages would cause more problems than it would solve
Housing prices peaked more than six years ago, in April 2006—meaning that the housing bust has now lasted longer than the post-millennial housing bubble. The Obama administration’s failure to deal with the legacy of debt continues to douse any hopes of recovery. It poses another danger, too. As the purveyors of conventional wisdom refuse to proffer reasonable remedies to a solvable problem, more creative people can credibly present radical—and completely misguided—solutions to increasingly desperate local governments. The latest such gambit: using eminent domain as a tool to rescue underwater mortgages.
It doesn’t take a genius to see the biggest problem afflicting the economy. During the housing bubble—say, starting in 2000—home prices more than doubled on average. The high prices didn’t reflect any real value or wealth, just an easy-money world. During the same time period, housing debt exploded, increasing by 97.2 percent. And even as house prices faltered, lenders and investors seemed oblivious. Housing debt rose another 12 percent before finally stalling out in spring 2008, when investment-banking giant Bear Stearns collapsed. Today, outstanding mortgage debt remains 2.7 percent higher than it was in the spring of 2006.
People haven’t just lost their ephemeral wealth; they’ve lost 20 years’ worth of savings and investments, mostly in their homes. But they haven’t shed their debt, which is weighing down new investing and spending. Americans have been variously unable or unwilling to spend or invest, thus triggering higher unemployment, since investing in new projects and buying goods and services creates jobs.