Let the Market Crash? Sep 6th 2010, 17:50 by R.A. WASHINGTONTHE New York Times has a weird piece today on housing
market policy. It reads: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.When
prices are lower, these experts argue, buyers will pour in, creating
the elusive stability the government has spent billions upon billions
trying to achieve...The further the market descends, however, the more
miserable one group — important both politically and economically —
will be: the tens of millions of homeowners who have already seen
their home values drop an average of 30 percent.There are several
strange things about this. One is the implication that housing prices
nationally need to "crash" to approach equilibrium values. Prices
nationally have nearly returned to their long-run trend in terms of
price-to-rent and price-to-income ratios. Some segments of some
markets may still be overpriced, and I expect prices nationally to
edge downward in the months to come, but another plunge seems both
unlikely to occur and unlikely to generate a wave of buying—at this
point a crash would probably be indicative of a new wave of crisis
that wouldn't be associated with easy credit and willing
buyers.Second, it's a little strange to attribute all of these various
programmes to the administration. Low interest rates? Barack Obama
would love to be able to dictate directions to the Fed, but it was not
his decision to cut the Fed's target rate to near zero and purchase
trillions in debt.Third, it's simply not true that the administration
has rolled out every programme it can think of. Economists with which
administration officials are very familiar have proposed measures to
deal with the real problem in housing markets: negative equity.
Promising policies like mortgage cramdowns and own-to-rent programmes
have yet to get a serious look from Washington leaders. But
ultimately, a real fix for housing markets must address underwater
mortgages. Absent some attempt to deal with negative equity, a rush of
buyers into the market will accomplish little; the problem is that
underwater homeowners can't afford to sell at prevailing prices.
Driving those prices lower won't change that fact.The truth is that
the trouble in housing is not, for the most part, a demand-side issue.
The problem is the millions of homeowners stuck in houses they can't
afford to sell. These households represent a significant shadow supply
of foreclosures-in-waiting. I agree that it would be silly for the
administration to try to support housing prices by offering more
goodies to potential homebuyers. But it doesn't follow that letting
prices go their own way will magically get housing markets moving
again.
market policy. It reads: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.When
prices are lower, these experts argue, buyers will pour in, creating
the elusive stability the government has spent billions upon billions
trying to achieve...The further the market descends, however, the more
miserable one group — important both politically and economically —
will be: the tens of millions of homeowners who have already seen
their home values drop an average of 30 percent.There are several
strange things about this. One is the implication that housing prices
nationally need to "crash" to approach equilibrium values. Prices
nationally have nearly returned to their long-run trend in terms of
price-to-rent and price-to-income ratios. Some segments of some
markets may still be overpriced, and I expect prices nationally to
edge downward in the months to come, but another plunge seems both
unlikely to occur and unlikely to generate a wave of buying—at this
point a crash would probably be indicative of a new wave of crisis
that wouldn't be associated with easy credit and willing
buyers.Second, it's a little strange to attribute all of these various
programmes to the administration. Low interest rates? Barack Obama
would love to be able to dictate directions to the Fed, but it was not
his decision to cut the Fed's target rate to near zero and purchase
trillions in debt.Third, it's simply not true that the administration
has rolled out every programme it can think of. Economists with which
administration officials are very familiar have proposed measures to
deal with the real problem in housing markets: negative equity.
Promising policies like mortgage cramdowns and own-to-rent programmes
have yet to get a serious look from Washington leaders. But
ultimately, a real fix for housing markets must address underwater
mortgages. Absent some attempt to deal with negative equity, a rush of
buyers into the market will accomplish little; the problem is that
underwater homeowners can't afford to sell at prevailing prices.
Driving those prices lower won't change that fact.The truth is that
the trouble in housing is not, for the most part, a demand-side issue.
The problem is the millions of homeowners stuck in houses they can't
afford to sell. These households represent a significant shadow supply
of foreclosures-in-waiting. I agree that it would be silly for the
administration to try to support housing prices by offering more
goodies to potential homebuyers. But it doesn't follow that letting
prices go their own way will magically get housing markets moving
again.
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