A blog on politics, economics, culture, philosophy, the media, real estate, pets, love, food and wine. From a Tea Party perspective!
Hansel and Gretel
Hansel and Gretel meet Nanny Pelosi
Tuesday, February 22, 2011
Veronique de Rugy Debunks Housing Market Myths on Bloomberg
Editor’s Note: Reason columnist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.
Myth 1:In order for the economy to recover, housing prices have to reach pre-recession levels. They cannot decline further. Therefore the government must continue to prop up housing prices or provide incentives to encourage people to buy homes.
Fact 1:Pre-recession housing prices were a historic anomaly based on easy credit caused in part by misguided government policy. Lower housing prices are not bad for everyone. They are also the only way to get rid of our bloated housing inventory.
The idea that economic recovery can’t happen unless our housing prices return to pre-recession levels makes no sense.
First, as the chart below shows, for most of American history housing prices grew at a relatively slow rate. It was only in the last 15 years that prices exploded. The factors behind this sudden change are a mixed bag of government policies that encouraged homeownership and cheap interest rates and a willingness by banks to lend to people who could only realistically afford to pay if housing prices doubled every two years. George Mason University economist Russ Roberts has a very good blog postexplaining why housing prices went up so fast.
Second, low prices are not bad for everyone. Yes, low prices are bad for homeowners who are trying to sell and for banks that have lots of bad loans on their books. But low prices are very good for people who want to buy houses. They are also very good for low-income buyers who were priced out of the market in recent years. Finally, low prices are good for people who build homes.
But most importantly, only lower prices can address one of the major problems of the real estate market: a bloated inventory of unsold homes.
The inventory of existing homes stood at 3.71 million in November 2010, about where it was four years ago, according to the National Association of Realtors. Add to that the 197,000 new homes for sale and you can see just how bloated the inventory of unsold homes has become.
As Bloomberg’s Caroline Baum wrote in January: “The demand curve is downward sloping. What that means is demand for any good or service isn’t fixed. It depends on the price. A $1,000 cashmere sweater will find a lot more takers when it’s marked down to $500 in a post-Christmas sale. In general, the lower the price, the greater the quantity demanded. Hence, a reduction in prices could address this glut.”
We need a reduction, not an increase in prices. A return to the historical norm, not to the recent anomaly. This means that state and federal policies which prop up housing prices are discouraging the market from taking the steps necessary to get back on track.
Myth 2:We need a foreclosure moratorium to help those people drowning in debt who have had to default on their mortgages.
Fact 2:Defaulting on a mortgage does not necessarily reflect an inability to pay. The current crisis has produced a new phenomenon: homeowners who default by choice. A moratorium would eliminate the current penalty and thereby encourage more people who are still able to pay to walk away from their obligations.
While some foreclosures are driven by homeowners’ economic hardship, there is much evidence to suggest that many other foreclosures are driven by the homeowners’ rational economic calculus.