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Posted at 4:50 PM ET, 12/30/2010

Home, sweet home

By Ezra Klein

There's been a lot of pessimism on the housing markets going around lately. Ryan Avent has a more optimistic take:

If home prices stabilised from May of 2009 to May of 2010 while conditions were highly uncertain, then sank as broader conditions deteriorated, it is somewhat difficult to imagine how they would fall precipitously as conditions brightened to their strongest state since before the recession. Dynamics in housing markets aren't supportive of strong growth. But neither are they worsening. Defaults may have peaked. Total REO inventory is high, but it has been higher. It's easy to imagine continued collapse in some local markets, where supply and demand remain very out of whack. But it's more difficult to see where a national crash might originate.

The most likely candidate is a major policy error. If the Fed reversed policy and began tightening, then prices would surely fall sharply. If the government ceased supporting mortgage markets while the supply overhang continues, then prices would surely fall sharply. But everything we've seen from Washington so far indicates that Republicans, Democrats, and the Federal Reserve are very focused on preventing a major deterioration in home prices.

Real prices are close to normal levels. So is the price-to-rent ratio. The economy seems to be growing at an accelerating pace. Employment growth seems likely to continue picking up pace. Supply overhangs persist, but markets in most metropolitan areas are far tighter than they were. And no one in Washington wants to see prices fall another 10%. So while I wouldn't buy in Las Vegas and wouldn't be surprised to see indexes of national prices come down a bit more, I don't see a case for another round of crashing values, outside of a major policy mistake. And for now I'm betting, as markets are betting, that a major policy mistake will be avoided.

By Ezra Klein  | December 30, 2010; 4:50 PM ET
 
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Comments

The long and the short of it is the housing market is in trouble because no one has "skin in the game" by having a large down payment.

100 years ago about 2% of homes had a mortgage. There was no bubble. There was no skewing of markets. There was no crisis.

Now about 2% of homes *don't* have a mortgage and we have the problem we have.

The credit was opened, excess money flowed into the market raising prices, and now no one wants to go back to a system of responsibility.

Economics is not just a good idea....it's the LAW!

Posted by: WrongfulDeath | December 30, 2010 5:58 PM | Report abuse

I'll add too, aside from some investors, the only people who really benefit from high housing prices are people who will be moving from a larger, or relatively more valuable home, to a smaller, or relatively less valuable home.

If you're staying put you don't benefit. You don't see that money. You could take it out as a home equity loan, but if you intend on paying back that loan – with interest – you aren't helped. In fact, higher home values mean higher property insurance rates.

And if you're moving to a different house of the same size, or value, then there's no gain if prices go up. It's one expensive house to an equally expensive house. The only ones who gain are people moving from a larger home to a smaller one. If you're doing the reverse, say moving from a small house or condo to a bigger one to start a family, then you're severely hurt by high housing prices. And you're children and grandchildren are really hurt by the burden of crushing housing payments – look at young people in Japan who have to take out 100 year mortgages.

Increasing and high housing prices are a very large and iniquitous transfer of wealth and income. They tend to increase consumption and decrease good high return (high total societal util return) investment. They increase income inequality and do far more harm than good over the long run.

Posted by: RichardHSerlin | December 30, 2010 6:55 PM | Report abuse

Sorry, here's the comment I meant to submit, not the above one:

"There's been a lot of pessimism on the housing markets going around lately. Ryan Avent has a more optimistic take"

Ezra, I'll repeat my earlier comments on this. Over the long run, housing prices dropping is good not bad.

As an adjunct professor of personal finance, and president of National Personal Finance Education, I ask you, is it really grim, or bad, over the long run, and overall, that housing prices fall?

If real, inflation adjusted, housing prices dropped all the way to one cent for a typical three bedroom house, would this do more bad than good, or would it be an incredible boon to almost all families, who would now be financially far more comfortable and secure – and especially their children?

I had a post on this which was quoted by Mark Thoma, at:

http://economistsview.typepad.com/economistsview/2008/08/wishful-thinkin.html

I hope you'll take a look at it.

In my earlier comments on this, other commenters responded stating problems with dropping home prices. My response was this:

Any negative of housing prices plunging can be counteracted in a far better way than by propping them back up.

– A drop in property tax revenues? Increase income taxes progressively, especially on the very wealthy, by an equal amount, and hopefully at the federal level, with the money intelligently and fairly kicked back to the states.

– More bank defaults? Big change in the process of reorganization to make it far faster and better, so the government can very quickly take over the failing bank and keep it lending while it's reorganized and its debts are written down. And far more and better bank regulation to stop these situations to start with – Some of this was, in fact, put in the recent banking reform bill that passed.

– A drop in aggregate demand from homes no longer being ATMs? Replace the spending on big screen TVs and granite countertops with high return investment in education, infrastructure, alternative energy, basic science and medicine, etc. (despite Ezra's recent post on this, much of this can be done over two or three years, especially with greatly increased grants to the states to give them the manpower to speed the approvals and planning. Plus, knowing this stuff is coming on line in the next few years increases consumption and private investment now in anticipation)

Posted by: RichardHSerlin | December 30, 2010 6:57 PM | Report abuse

Of course, with regard to the above remedies, it's extremely difficult to get anything positive past the Republicans, unless we eliminate the filibuster in its new perverted form, but over time...

I'll add too, aside from some investors, the only people who really benefit from high housing prices are people who will be moving from a larger, or relatively more valuable home, to a smaller, or relatively less valuable home.

If you're staying put you don't benefit. You don't see that money. You could take it out as a home equity loan, but if you intend on paying back that loan – with interest – you aren't helped. In fact, higher home values mean higher property insurance rates.

And if you're moving to a different house of the same size, or value, then there's no gain if prices go up. It's one expensive house to an equally expensive house. The only ones who gain are people moving from a larger home to a smaller one. If you're doing the reverse, say moving from a small house or condo to a bigger one to start a family, then you're severely hurt by high housing prices. And you're children and grandchildren are really hurt by the burden of crushing housing payments – look at young people in Japan who have to take out 100 year mortgages.

Increasing and high housing prices are a very large and iniquitous transfer of wealth and income. They tend to increase consumption and decrease good high return (high total societal util return) investment. They increase income inequality and do far more harm than good over the long run.

Posted by: RichardHSerlin | December 30, 2010 7:14 PM | Report abuse

Not a word about mortgage rates, the changing yield curve or the accelerated rate of foreclosures in the spring.

Sorry Mr. Avent you don't know real estate.

However, I am more inclined to agree that we're not looking at a 20% drop in prices, national average.

Posted by: 54465446 | December 30, 2010 7:53 PM | Report abuse

RichardSerlin wrote:

"If real, inflation adjusted, housing prices dropped all the way to one cent for a typical three bedroom house, would this do more bad than good, or would it be an incredible boon to almost all families, who would now be financially far more comfortable and secure – and especially their children?"

This is so inane, I wasn't going to reply, but for one thing it would bankrupt the Federal Reserve instantly where billions in mortgage backed securities taken in TARP are still held and would immediately be worth zero!

Posted by: 54465446 | December 30, 2010 8:00 PM | Report abuse


Ezra

You are full of it


You like the Constitution when it supports the bogus liberal agenda


However you DISRESPECT the 2nd Amendment, the 10th Amendment and the Interstate Commerce clause


Your attitude is a joke and if the Washington Post had any integrity they would fire you.


Case closed.


.

Posted by: RainForestRising | December 30, 2010 8:15 PM | Report abuse

"...for one thing it would bankrupt the Federal Reserve instantly where billions in mortgage backed securities taken in TARP are still held and would immediately be worth zero!"

This is an excellent example of "We would like to follow principle, but we can't turn back NOW because of the disruption it may cause."

It's an ignorant position. Things have gone horribly wrong, he knows it's a poor path that we've gone down, but the poster points to the disruption it may cause to correct things.

Would this same poster also believe that racial laws that were upheld by Plessy v Ferguson should have been continued because it might cause some disruption to stand on priciple and change our path?

Posted by: WrongfulDeath | December 30, 2010 8:19 PM | Report abuse

wrongfuldeath wrote:

"Would this same poster also believe that racial laws that were upheld by Plessy v Ferguson should have been continued because it might cause some disruption to stand on priciple and change our path?"

This is so bizarre, I nearly fell off my chair!

There is no moral principle at stake in some fanciful discussion of the effect of houses being bought and sold for a penny. The premise is so absurd, as is your post, that I wonder if New Year's celebration has already started.

Posted by: 54465446 | December 30, 2010 9:03 PM | Report abuse

RFR:

Where ya been son?

Posted by: 54465446 | December 30, 2010 9:05 PM | Report abuse

From the book "AN AUTISTIC WORLD (1)"
An asset bubble in not based on an illusion; it is founded in the interpretation of the truth by some individuals that consider the circumstances under a controlled environment, when in reality, their lack of knowledge or their private interest manage to form an indefensible situation. Usually those bubbles are created not by improving regulations, but by the inability of removing barriers on time. They act more like dams than bubbles.
The housing situation is a good example. Many would like to think that the unrealistic condition of the past years was created by an excessive influx of new construction, when in reality the main cause was the social inability to produce an maintain jobs, which acted as an obstacle to the shortsighted ideology in place. The torrent of unqualified individuals that wanted to buy a house was much greater that the adeptness for the community to keep those people in a productive estate. That resulted in the convulsion of the entire economy, who at the time was dreaming with unlimited possibilities.

Posted by: kanino | December 30, 2010 9:33 PM | Report abuse

54465446,

Obviously houses couldn’t go to one cent real. Desirable land, wood, etc. is scarce. When we have robots building robots building houses, and infrastructure, and greatly increasing the velocity of resource recycling, etc. prices could plunge pretty far though.

In any case, the Fed can’t be bankrupted. They can print as much money as they want. If prices plunged a lot of people would decide to not pay their mortgages and walk away. Lots of banks and investors would lose a lot of money. Lots of families would gain a lot of money, a lot of net wealth. But the Fed could always print whatever amount of money it needs, and it thinks is appropriate to add to the economy given the tradeoffs of increased economic activity versus potential increased inflation. And the government could if it wanted to quickly take over failing banks and keep the lending going while the bad loans are written down and the bank is reorganized.

Posted by: RichardHSerlin | December 30, 2010 11:23 PM | Report abuse

RichardSerlin:

Thank you for the reply but I don't think you know much about the Fed, they actually DO have a balance sheet. Furthermore you are talking about a Weimar Republic type of inflation scenario.

While I can buy your idea that higher house prices are not necessarily good for the economy, seriously falling house prices in THIS economy could be bad to very bad.

Posted by: 54465446 | December 31, 2010 12:47 AM | Report abuse


In a traditional refinance, insist on a good-faith estimate of the costs up front, before you give the lender a penny, search the web for "123 Mortgage Refinance" I would strongly recommend them. They got me 2.891% rate!

Posted by: clarafraley | December 31, 2010 1:01 AM | Report abuse

Klein means "small" in German and Dutch ..An apporpriates name for the Constitution hating moron. If Ezra finds the US Constitution baffling and irrelavant,I suspect his analysis of other issues might be suspect as well.

Quo warranto,B.O. ?

Posted by: SlovenianWonder | December 31, 2010 1:00 PM | Report abuse

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