‘Housing prices must fall, yet…housing prices must not fall’
Tyler Cowen sums up the central problem with our economy, asking “Should we let housing prices fall?”
Many smart people say we should. It seems increasingly clear that we must. For how long can the government prop them up? Are we never to have a private market in mortgages again?
Yet what happens if we let them fall? Arguably many banks would once again be "under water." Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.
I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck. Housing prices must fall, yet…housing prices must not fall.
Here is a very good Dave Leonhardt piece on two different views of housing. It’s where to go, if you are looking for the case for optimism. I am more pessimistic than David because I see the private sector interest in mortgage securities as remaining quite weak, which suggests the market knows which way prices have to move.
I don’t see any other way around this conundrum – housing prices are going to fall. End of story. They were massively inflated during the housing boom, and people simply can’t afford the sticker price – hell, they couldn’t afford the price five years ago, but at least then we were all under the dizzying impression that somehow prices would just keep going up, up, up…
I’d bet we have at least a 25 to 40 percent decrease in home values still ahead of us, depending on how badly inflated various regions became during the boom years. No amount of government policy will change this, though it might soften the landing a little. I think there needs to be more of a coordinated effort on the part of lenders to help people get out from under water. It’s in the best interest of the home buyers, the lenders, and Unlce Sam to make this happen. But there really is no easy solution in a situation where the necessary compromises by necessity lead to someone losing a great deal of money.
Whether now is the time to buy is another question altogether. Interest rates are very low, and buying now – after prices have come down significantly already – might make sense if you plan on keeping a property for a long time. That being said, the very fact that there is so much uncertainty over whether or not to buy a house indicates the likelihood of falling prices in the near future.