For the past few years (and, in reality, for decades before that), the government has tried to improve the nation's housing market by artificially inflating house prices. The mortgage-mod programs, the back-door bank bailouts, the Fed-subsidized mortgage rates, the $150 billion flushed down the Fannie and Freddie rat-hole--all these tactics and more have been designed to reduce monthly payments for mortgage holders and keep house prices high. .... But three years into the bailouts, people are finally throwing up their hands. As the administration tries to figure out what to do to save the Democrats in November, calls for a new form of housing action are emerging: STOP trying to keep house prices artificially high and just let prices fall. (See this article by David Streitfeld in the New York Times.) .... And what would this do? Well, in the short-term, if house prices fell to fair value (5% to 10% below today's level--see chart below), it would certainly lead to more folks walking away from their mortgages. It would also, thereby, lead to more bank writeoffs. But that's only fair. And the banks now have enough capital (and enough access to capital), so they'll be able to survive. Importantly, it would also allow a new generation of home buyers to step into the market and buy with the confidence that they won't get screwed if the government ever does decide to stop pumping up prices. (This is a big and justifiable fear.) Instead, new buyers will be able to look at long-term price-to-income and price-to-rent ratios and observe that they are buying houses at fair value or below--instead of at levels that are still artificially inflated relative to almost all non-bubble history. .... Here's a larger version of Robert Shiller's long-term house price chart. Note that prices (blue line) are still modestly above the long-term average:
....
But three years into the bailouts, people are finally throwing up their hands. As the administration tries to figure out what to do to save the Democrats in November, calls for a new form of housing action are emerging: STOP trying to keep house prices artificially high and just let prices fall. (See this article by David Streitfeld in the New York Times.)
And what would this do?
Well, in the short-term, if house prices fell to fair value (5% to 10% below today's level--see chart below), it would certainly lead to more folks walking away from their mortgages. It would also, thereby, lead to more bank writeoffs. But that's only fair. And the banks now have enough capital (and enough access to capital), so they'll be able to survive.
Importantly, it would also allow a new generation of home buyers to step into the market and buy with the confidence that they won't get screwed if the government ever does decide to stop pumping up prices. (This is a big and justifiable fear.) Instead, new buyers will be able to look at long-term price-to-income and price-to-rent ratios and observe that they are buying houses at fair value or below--instead of at levels that are still artificially inflated relative to almost all non-bubble history.
Here's a larger version of Robert Shiller's long-term house price chart. Note that prices (blue line) are still modestly above the long-term average:
Modestly! For the national median home price, perhaps. But for markets such as Los Angeles it could be another 20% or more. But the government can't levitate all prices forever --- I don't think. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
