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I'm not trying to be argumentative only to explain where I have issues with your proposal, which has the support of at least one Yale prof of econ.

The homeowner eats the loss.
If they can afford to take the loss they already would have. There are buyers if they are willing and able to sell at current market prices. There is no need for an artificial floor. 5 million(adjusted annual rate) or so existing homes sold last month. We can compare that to the beginning of the run up of around 6 million in 2004. Factor in scared underwriters and the proper exclusion of a large number of buyers and it is not as bad as it is made out to be, from a macro view point. Bubbles distort near term perceptions. The prices and sales volume of the bubble years need to be excluded or severely smoothed. If we project a more normal trend through the bubble we see that we are below trend and within natural variation.

The housing market is correcting on its own. This is not an over supply of beanie babies that can be unloaded on E-bay or O.Com. They are large ticket items that take a much longer time to find their buyer. The housing market will find a sustainable rate if allowed to do so and it will take time for it to level out.

Meanwhile the debt remains which is the primary issue. Households are servicing a high debt load under greater stress. There are two primary choices going forward sell now and eat the loss or service the debt and struggle forward.

Social engineering a 'vibrant' housing industry is partly what got us into this mess. Money was too cheap, houses were too many and loan standards were too low. Providing a floor price addresses none of the primary causes of this debacle.

The government takes a risk asset onto its balance sheet.

And the banks remove a risk that went south that they willingly took onto their balance sheet.

And the government is suddenly the largest holder of private real estate in the nation. The very same group that failed in proper over site of the secondary market for mortgages. The very same group that did not enforce underwriting standards. The very same group that is always looking for a feel good quick fix in order to get re-elected. The very same group that cannot pass something as basic to governance as a budget.

Clearing the current situation by free market alone would be a 10 to 15 year journey much like the great depression, maybe without the 30% unemployment.

By the numbers I'm watching I think we are much closer to the bottom. 4.5 - 6 million annual sales rate for existing homes is a sustainable rate add to that 400,000 + or - 50,000 new homes sales. August's number was 298,000 which is a common sense below trend number. There is approximately a 8.5 month supply of exiting homes and 6 months of new homes. The 8.5 months of supply is down from the prior months 9.5 months supply. The 6 month supply of new homes is encouraging. The further below 6 months that number falls the more housing starts and permit applications we can anticipate.

Talking to real estate folks and having recently gone through the buying process the biggest impediment is scared underwriters. Having bought and sold homes over 20 years I have never had to undergo the level of scrutiny we endured for this purchase and our credit history is spotless. We were denied an ARM which we were more than capable of servicing solely because the underwriter would not deviate one iota from some in house policy and how she defined X which had little to do with common sense and reality. A friend received +$5,000 in wedding gifts and his bank wanted to exclude that money because he could not document where it came from.

IMHO hyper-vigilance and fear of hyper-vigilance of new and old regulation is the largest impediment to the housing industry. That hyper-vigilance will fade over time. One way to encourage that would be by forcing banks to make their profits on the streets instead of from the Fed.

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