Home truth: Bailout is about home prices

WASHINGTON - Home prices. That's what the Bush administration's historic Wall Street bailout is really about.

Falling home prices nationwide have acted like dominoes, knocking homeowners into foreclosure and taking down lender after lender, until the entire global financial system was in jeopardy.

Experts say the government's enormous plan to relieve Wall Street banks of their bad investments has a decent chance of stabilizing home prices, at least in theory. If that happens, it will stop Wall Street's bleeding but could keep many families locked out of the housing market.

By buying troubled mortgage debt from major banks, the government can help make more money available to borrowers, and maybe at lower interest rates. The government also will have more power to modify delinquent loans and keep homeowners out of foreclosure.

"If the government - as the mega-investor - can speak with one voice . . . there can be big changes in the rate of foreclosures," said Alan White, a law professor at Valparaiso University in Indiana and a longtime consumer lawyer.

The downside, however, is that in many areas such as California and Florida, where prices soared and are now falling precipitously, homes in many cities remain unaffordable for many families, even well-paid professionals.

For example, Paul Castor, a corporate lawyer, is reluctant to buy a house for his family in San Diego at current prices.

He has a down payment of more than 20 percent and has made two offers in recent weeks, but the sellers' asking prices "were unrealistic, and I wasn't going to budge."

If nobody accepts his offer, Castor says he is more than willing to keep renting and hope home prices fall further.

"The root cause of the problem is that we don't have any homebuyers," said Edward Leamer, an economist at the University of California, Los Angeles. "They're going to sit on the sidelines - by and large - until they get a better deal."

Rather than reward Wall Street investors for making bad decisions and exposing taxpayers to hundreds of billions in losses, Leamer said the government should provide incentives for first-time homebuyers to get into the real estate market.

Even if the government's plans succeed, experts say they don't foresee a dramatic recovery in home prices soon.

"When housing rebounds, it will not do so with the kind of speed and activity that we have seen in the last couple of years when the housing market was strong," said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton.