Saturday, June 23, 2012

Reviving Real Estate Requires Collective Action

IMAGINE that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.

This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.

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1 comment:

  1. If such home loan major discount rates could be used on a huge, there could be huge community effects, increasing a sense of positive outlook among property owners and increasing the value of all houses and, eventually, the whole economic system. But home loan companies in all their different types lack a group strategy.