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Accidental Suicide Pacts and Creditor Collective Action Problems: The Mortgage Mess, the Deadweight Loss, and How to Get the Value Back

For six years now, the nation has been struggling with the fallout of a residential real estate bubble and bust. From their 2006 highs, housing prices are down nationally by 26.4%. In harder hit communities, the figure is significantly higher. In Nevada, for example, house prices remain 51.6% below their 2006 peak levels. This is notwithstanding continuing cyclical fluctuations pursuant to which prices routinely rise in the summer only to plummet again between annual ‘peaks.’

The cyclical character of post-bust housing prices undercuts occasional suggestions that the housing markets are ‘recovering.’ Non-seasonably adjusted Case-Shiller 20-city composite housing price data compiled since July 2006 and represented below in Figure 1, for example, indicate that the highest post-bubble price peak prior to this past summer came not last year or the year before that, but in July of 2010, while early 2012 saw the deepest post-bubble trough since January 2009. After the recent 2012 seasonal peak, in turn, prices again dropped in October and November. They then recovered some of that loss in December and January, but remained below their September seasonal peak. The point, then, should be plain: short-term cyclical gains do not constitute ‘turnarounds.’ Long-term trajectories, which we can predict only partly by reference to recent trends, while also by reference to causally relevant conditions, are what matter. Millions of deeply underwater and accordingly at risk mortgage loans are as causally relevant as can be. We would be foolish, then, to view any one season’s price rises as indicia of ‘final recovery,’ just as we would be to view one cooler summer as ‘disproof’ of climate change.

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