Let the Housing Market Fall
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash. (emphasis added).
This perspective has been my view since the crisis started: housing prices during the bubble rose to levels that made no economic sense, and these prices are still excessive relative to history or compared to reasonable estimates of construction costs for new housing.
So attempts to prop up the housing market just delay an inevitable reallocation of resources from housing to other activities. It is a misguided attempt to bail out homeowners who purchased houses they could not afford, and to help bankers holding assets backed by housing.
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