Dealing with Economic Externalities in the Real Estate Industry. Letter addressed to a mayor - Essay Example

One of the most important externality can be found in the mortgage subsector. In the housing industry, an externality called a positional externality has led to products being very expensive. Positional externalities happen when the individual using the product or the service intend to one-up each other. This is something that has been witnessed in the real estate industry for a long time. As Grant (37) says, externalities affect all categories of land use and this is something that must be considered in a more modern and serious manner.

While this kind of an economic externality has affected the industry in a long time, the effects have been felt the most in recent time. In fact, economic externalities in the mortgage subsector were highly associated with the recent economic recession in the United States. Increased availability of mortgage service has led to most people affording to buy their own homes through mortgage financing. While increased home ownership is important and necessary for the growth of the economy, it can lead to dire repercussions when done in the wrong way.

As the availability of mortgage financing increased and more people were now looking for homes to buy, the costs of homes increased in a very fast rate that exceeded the market growth and inflations rates. This sudden hiking of the cost of owning a home happened so fast that at some time, the market started imploding. At this point, many individuals could who had taken loan could no longer to be able to remit their mortgage repayments and this unfortunately led to foreclosure of their homes. They could also not be able to sell off the homes at a cost high enough to cover the original costs of the homes.

In this way, mortgage financing can be seen as having a great external cost to most individuals who would otherwise be able to buy their own homes without having to depend on mortgage financiers. A closer analysis reveals that increasingly availability of rarely controlled mortgages have two types of external costs to the economy. First, it makes homes unfairly expensive for would-be home owners. Secondly, it leads to the crunching of the real estate market making it impossible for individual who had bought their homes at exceedingly high costs to be able to recover their costs by selling their homes.

Need for control The mortgage subsector has been left uncontrolled and unregulated for a very long time. This has led to the participators in the industry to operate in a way that is less professional and also in a way that has led to many individuals having to lose a lot of money through a mortgage industry that is operated in a racket manner of operation. Most mortgage regulation laws are archaic and are not able to meet the needs of the modern mortgage market. Regulating the industry will be important for protecting the many people who will definitely otherwise be affected by the poorly managed mortgage industry.

Regulation in the industry should be geared towards ensuring that mortgage providers are careful and professional in the way they offer this product. Of essence will be to ensure that the mortgage providers do not operate in a way that will negatively affect their customers. The government should come up with a framework to guarantee that the mortgage providers are careful in the way they provide the product in terms of ensuring that they serve customers who are ready and capable to repay the mortgage.

This will reduce or eliminate the number of home