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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Jim McMannis who wrote (155287)	10/8/2008 12:13:42 PM
From: Jim McMannis	Read Replies (1) \| Respond to of 306849

Why We Should Let Housing Prices Keep Falling Edward L. Glaeser is an economist at Haaaarvaaaard. economix.blogs.nytimes.com Our current financial crisis stems ultimately from the large number of investors betting, unsuccessfully, on real estate. So, when real estate markets came tumbling down, Wall Street fell with them, putting the entire global economy at risk. The connection between real estate and the current crisis has led a number of observers to argue that the government should try to do something to stop housing prices from falling further. A miraculous new boom in housing prices would enrich our troubled banks, and reduce the need for any explicit bailout. Some argue for large-scale credit market interventions that would make borrowing cheaper. Others think that bailing out troubled homeowners will stop the price decline. Extreme solutions include large-scale public purchases of housing or destroying large swaths of the housing stock. There is a superficial attractiveness to policies that seem to promise an end to falling housing prices, but there are three reasons why these proposals don’t make much sense to me. First, the government has no business trying to make housing less affordable to ordinary Americans. Over the past 10 years, areas like New York and San Francisco, which had always been expensive, became completely out of reach. According to the National Association of Realtors, the median housing price in San Francisco was over $800,000 in 2007, and has declined to a mere $685,000 in the second quarter of 2008. The real problem is not the current price decline, but the previous price explosion. There is no reason to hope that middle-class Americans should pay more for any basic commodity, whether that commodity is coffee or oil or housing. Government should be fighting to reduce supply-side barriers and make housing cheaper, not trying to inflate prices artificially. Second, most of these proposals seem likely to be expensive failures. The government just doesn’t have the tools to rewrite the laws of supply and demand. If the cost of building a home in Las Vegas is $150,000, and there are no restrictions on building, then all the credit policies or bailouts in the world aren’t going to permanently keep prices above $150,000. Interest rates, and credit availability, do affect housing prices, but the impact is modest. The figure shows the time series of housing prices (according to the price index assembled by the Office of Federal Housing Enterprise Oversight) and the real 10-year interest rate, before the current downturn. Over the whole period, a 1 percent cut in the real rate is associated with a 3.3 percent increase in prices. Further interest rate reductions are unlikely to undo much of a 20 or 30 percent housing price decline; no credit market policies can keep housing prices above construction costs forever in areas where there are few legal or physical restrictions on building new houses, as in Phoenix and Atlanta. Interest rates and housing prices (Source: Edward L. Glaeser) Finally, these policies all have the common feature of getting the government further entrenched in the operation of the housing market, and this creates all sorts of long-term market problems. I would have thought that recent events at Fannie Mae and Freddie Mac, for example, would have made Americans recognize the costs of having government-sponsored enterprises play mortgage lender to the nation. I would have hoped that the history of public housing would have made us wary about spending huge amounts of tax dollars to get into the business of public property management. The current crisis may imply a need for more federal regulation of lending, but it does not suggest that the federal government should be subsidizing more borrowing. We do need action to fix our banking system, but we don’t need quixotic policies aimed at pushing up housing prices. I suspect these policies have some appeal because they seem to help homeowners (like myself) as well as financiers. Still, the government can’t repeal the laws of supply and demand in the housing market. The price decline should remind homeowners, and home buyers, that housing should never be seen as a short-term speculation, but rather as a place to live, and hopefully to enjoy, for the long run.