Time for house prices to start falling again
By Justin Fox
The big economic news of the day, and probably the week, was the big drop in existing-home sales in July reported this morning by the National Association of Realtors. This was to a certain extent expected after the expiration of the home-buyer tax credit in the spring, allowing NAR chief economist Lawrence Yun to offer up the delightfully sunny spin we have come to expect from NAR chief economists:
Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. ... However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.
But the drop was a lot sharper than expected -- sales were at their lowest level in 15 years -- and the economy is not yet consistently adding jobs. CalculatedRisk has a more believable forecast:
I expect house prices to fall further later this year as measured by the Case-Shiller and CoreLogic repeat sales house price indexes, although I don't expect huge declines like in 2008. My expectation is further price declines of 5% to 10% on the repeat sales indexes.
Whether or not that turns out to be exactly right, the main point is that we're still a long way from working through the aftereffects of housing bubble. And while the do-anything-possible-to-boost-housing-prices-and-keep-all-the-banks-from-going-under philosophy that has guided policymaking in Congress and at the White House, Treasury and the Fed over the past couple of years made a certain amount of sense in the midst of a financial crisis, it doesn't anymore. House prices need to fall some more (in real terms, at least) to lure in enough buyers to pull the housing market out of its depression. So why not accept that reality, and push policies that help people cope with the effects of it, rather than continuing to prolong the inevitable?
Justin Fox is editorial director of the Harvard Business Review Group and author of "The Myth of the Rational Market."
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