None of these foreclosed houses is going to disappear. After a
foreclosure, one family moves out, and another moves in. We see the sad
faces of the people moving out, but we don’t as often see the happy
faces of the new homeowners moving in. Nevertheless, those happy faces
are out there, and we should not discount them.
Here is more. I take the case against foreclosures to be the following. The people getting kicked out lose their credit ratings and in the medium term they spend less. The people moving in presumably have higher credit ratings but they probably aren’t rich. They transfer a big chunk of their liquid wealth to a possibly-low-propensity-to-spend financial institution. So foreclosures lower nominal aggregate demand and in times of a downturn this can be bad.
Landsburg’s title may just be provocative but I would make a distinction between the case for allowing foreclosures (I do not advocate that the federal government rewrite the mortgage contracts, although renegotiation could be made easier) and the case for foreclosures. I should note he is quite correct to insist that foreclosure victims are hardly among the world’s — or even America’s — neediest cases. If you think government can do anything well at all, ask what it can do for underprivileged young children. On both justice and efficiency grounds the greatest potential gains lie there. And continued home ownership is not the main thing they need.