A radical proposal for stabilizing the housing market

Martin Feldstein, a Harvard economist who was chair of Ronald Reagan's Council of Economic Advisers advanced  a bold proposal for stabilizing the nation's housing market in a recent New York Times Op-Ed.  Since the bursting of the housing bubble, Americans have lost $9 trillion dollars in the housing market, with prices declining 8% since June 2010.  Feldstein maintains that unless we can halt this slide there is no hope for economic recovery.  He proposes writing down the principal on all US home mortgages to 110% of the home's value.  The cost of this write down would be shared equally by the banks and the Federal government.

While this proposal has little chance of being enacted given the political climate today, it does get to the heart of the problem with housing - the vast number of homeowners who are hopelessly underwater with their loans.  People in this situation cannot sell in order to move to a region where a job might be available nor can they refinance to take advantage of a lower rate and gain more disposable income due to a lower monthly mortgage payment.  They also face the ever present temptation to simply walk away from the home which would add to the consistently high  number of foreclosures which more than anything else continue to drive down the value of everyone's home.