NY Times: Housing Woes Bring New Cry: Let Market Fall

[marmar]

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.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.” ..........(more)

The complete piece is at: http://www.nytimes.com/2010/09/06/business/economy/06housing.html?_r=1&hp

[stray cat]

1. Where housing prices have severely outpaced salaries it makes sense

Incomes for workers have been impossible to increase in ny as quickly as the exponential growth in house prices

[Barack_America]

2. There's a lot about this that doesn't make sense.

It was touched on in the article, but I think it is a larger point. Why would a falling market necessarily attract new homebuyers? Many homebuyers are not on the sidelines because they can't afford to buy, but because they are skittish to. Crashing house prices with an uncertain bottom will hardly encourage renters that now is the time to jump in.

Not mentioned at all was what rapidly falling house prices does to municipalities who depend on property values to run. How do these municipalities deal with rapidly falling revenue without laying off workers?

I say this as a probable home buyer next Spring. Sure I'd love to see prices come down somewhat, and I do agree that prices in many areas are still inflated, but if we get the sense the market is in free fall next Spring, we'll be (reluctantly) renting again.

[spooky3]

4. around here (DC area) they raised the property tax rates and

other fees to offset the loss in revenue.

[Smarmie Doofus]

3. I'm in NYC. Can someone show me where these ....

... falling prices are?

[ldf]

5. the rich may get slightly better deals

on their multimillion dollar apartments, but the rest of us lowlife (NOT millionaires) will never have a chance at a decent apartment in a decent neighborhood in manhattan.

just who the hell do we think we are, anyway?

[ThomCat]

6. I'm in NYC too, and I haven't seen any falling prices either.

Real estate, and rents, have remained very stable. Or climbed.

They are still at the inflated rates they were at because of the real estate bubble. So when do they come down?

They NEED to come down. People can't afford to keep paying these prices when income levels have dropped through the floor. :(

[Smarmie Doofus]

13. ThomCat....

It's Smarmie... formerly PaulHo..... from Riverdale.

I sold my coop last year , and made a 50,000 profit after 6 years of ownership. And the first person that looked at the apartment bought it.

That's a down market?

I'm now renting a few blocks away in a PH. That's no bargain either... when you figure in the loss of the tax deduction , it was considerably cheaper to own.


Anyway, I want to retire pretty soon and it doesn't exactly look like I'm going to be able to stay here when I do. And, increasingly, i don't really *want* to.

Glad you checked in. How are you doing? PM me some time.

[ThomCat]

25. PM Sent

:)

[unblock]

7. smarmie doofus, indeed. nyc is pretty much the only place in the country that escaped the crash

in real estate. an island unto itself, in more ways than one.

prices have stabilized or are even on the slight increase now in many areas, but we're hardly out of the woods just yet.

[Skittles]

8. yes, let it crash

let houses be valued at what they are ACTUALLY WORTH

[Warren DeMontague]

15. Houses are actually worth

whatever people will pay for them, at any given time.

Sorry, but that's the truth. There is no objective "actual worth" to real estate.

[Skittles]

16. bullshit

you're gonna say that with the economic meltdown going on? Houses were NEVER worth what they were selling for - it took outright FRAUD AND GREED to keep the prices there as long as they did.

[Warren DeMontague]

17. I'm going to say that the 'worth' is determined by what the market says, yes.

I think trying to arbitrarily set an objective value on, say, a house, is silly. Is it the sum of the parts and materials? The labor that it took to build it? The market value of the dirt and rocks in the land?

It's silly. The market was over-inflated for a lot of reasons, yes, but saying it was over-inflated is not the same as asserting there is some mythological "real value" that home prices should return to. They are going down, certainly, and I for one am not surprised.

[Skittles]

20. it was all a massive FRAUD

[Warren DeMontague]

21. I'm not saying it wasn't. The bubble was predicated upon a lot of it.

But, again, that's not the same as asserting that there is some "real value" that real estate prices are supposed to return to. I'm curious what that would be, actually.

[Skittles]

24. prices people can afford without being ripped off by ARM

the way it USED TO BE, the way it SHOULD BE

[JVS]

22. If you look to the market as the arbitrator of value when it's up, you should accept it when ...

it crashes.


If sellers want to move their houses now they have to offer low prices.

[Warren DeMontague]

23. No, I'm certainly not saying that was the "actual, real" value.

What I'm saying is, there is NO 'actual, real' value for prices to return to. They can, and probably will, go back down to something sane. But that's not the "actual value" of the real estate. Such a thing doesn't really exist.

[unblock]

9. the usual government reaction to crisis is to stabilize the INSTITUTIONS rather than the economy

in the case of the bush bailout, the idea was to keep the (remaining) BANKS from going under, without really helping the underlying cause of the problems. in fact, preserving the banks ensured that the bad loans would remain as a problem for years, as we have seen. bankruptcy at least cleans the slate and lets the past be the past and we can all move forward.

but there are campaign contributions to be had for propping them up, and not enough on the side of let them fail.

housing prices don't really need to drop, the banks' books need to be cleared. once they resume normal lending, the housing market will stabilize and in fact pop.

[BzaDem]

10. Bankruptcy of the big banks would have cleaned the slate, but it would have also caused 25-30%

unemployment (plus underemployment, those not seeking work, etc). That's why even the most left-leaning economists were in favor of the bailout and believed its necessity to be beyond serious argument.

So the reason the banks were bailed out had to do with preventing a depression. It might have had the side effect of not allowing a clean slate, but that was a side effect (not the actual reason).

[unblock]

11. no, that's the argument that the bailout was better than doing absolutely NOTHING

no one thought gave much thought about any reasonable alternative.

i agree that letting them fail and leaving nothing in their stead, waiting from private entrepreneurs to start new banks would have been disastrous.

but the government could have stepped in and formed a new bank or banks, the much the same way the formed fnma, fhlmc, etc., and immediately hired, everyone from each failed bank (with a few notable adjustments at the top), and given it some nice seed money and a CLEARLY DEFINED charter to lend and act in the public interest. this way the failing banks go bankrupt and everyone who should have taken the hit would have actually taken the hit, but the lending would have resumed almost immediately, so the economy would not have suffered any more than necessary. in any event, we would have been clear of the problems very quickly, rather than having it linger painfully for years.

there was some talk about a "good bank/bad bank" solution, but it couldn't garner enough support (i.e., campaign contributions).

[BzaDem]

18. No, that's the argument for bailing out the existing banks.

As articulated by practically all progressive economists. None of them think that letting them all fail and creating new public banks in their stead was a reasonable or even possible alternative in that timeframe (or outside of that timeframe).

[unblock]

26. that's not what i recall

there was some pointing to sweden as an example, dismissed by conservatives as "socialist". this was done with rbs as well.

splitting a bank into a good bank and a bad bank takes almost no time at all.

the idea of creating a single aggregator bank with a brand new infrastructure to handle everything, THAT might take too long. or the idea of paying for toxic assets at face value, there was big objection to THAT. but splitting each bank into a good bank / bad bank IF DONE PROPERLY should have received more attention.

[BzaDem]

30. All of what you describe are actually bailouts of private banks, and were the exact OPPOSITE

of bankruptcy.

A nationalization doesn't preclude a bailout. Sweedish banks were nationalized, but the government backed their debt. There was no bankruptcy. The only difference is that Sweeden made money on the upside (and that is the only difference Krugman cites). Well, we also made money on the upside, through our shares of preferred stock. Perhaps we didn't make as much money. But that is not a fundamental difference.

As for good bank/bad bank, what do you think happens to all the debts that are put in the bad bank? They are taken over by the government. That is a bailout, not a bankruptcy. If the bad bank went bankrupt, the creditors would legally be able to go after the good bank. The only way to prevent that is for the government to assume all the debt of the bad bank. That is fundamentally indistinguishable from what we did. (The benefit to a good bank/bad bank situation is that the good bank is now clearly solvent, which reduces uncertainty to investors. This is a technical difference, but not a fundamental difference. It is still the exact opposite of a bankruptcy.)

In truth, there are two options. Bailout (with whatever form) or bankruptcy. The other distinctions are just details in the grand scheme of things. Progressive economists essentially unanimously favored a bailout, and explicitly were horrified that there was even a possibility of bankruptcy after TARP failed the first House vote. The same progressive economists who are single payer advocates, modern WPA advocates, etc. They knew that bankruptcy meant depression and 25-30% unemployment, plain and simple.

[Odin2005]

12. Yes, let it crash, no use holding up inflated prices, it just makes things worse...

...in the long run.

[Hosnon]

14. The folks at CalculatedRisk agree.

And they're my "Nate Silver" of economics.

Let values drop to reality.

[JVS]

19. How is it in the public interest to make public policy to favor sellers over buyers?

[wickerwoman]

27. Not really sure how it works in the US,

but won't letting the property market crash reduce the amount of property taxes collected even more meaning that cash strapped local governments will have even bigger problems than they already do?

Not saying that I know the solution, but maybe it's the fear of the bottom falling out of property taxes that is driving policy to prop up the market.

[sendero]

28. Interesting idea...

... if you are willing to let our already insolvent banks have NO CHANCE of becoming solvent in our lifetimes.

Don't forget folks, the big banks still hold scads of MBS/CBO crap. They were exempted from carrying it on their books at its current market value.

They are UNDERWATER in a BIG WAY and will DROWN if housing prices drop significantly more.

Since it would be BAD FOR BANKS it is NOT GOING TO HAPPEN.

[deacon]

29. "Experts" smoking cigars by their inground pools enjoying the benefits of people going down

the tubes. As they say in the barbershop..."next."

[mike_c]

31. agree 100 percent....

I'm a case in point. I make a decent salary, well above the median income for my (admittedly) depressed region. I am the sort of person who was once the backbone of the American real estate market-- I can afford to buy property.

The problem is that I have an acute sense of value, and the real estate market has been so grossly overvalued for the last couple of decades that in my estimation only fools buy property at market value. The only ones who really come out ahead are the bankers. It is WAY less expensive for me to rent and save the money that would otherwise go to mortgage payments. The house I rent costs me $900/month (up from the $750/month I paid for the first five years or so). The house next door, which is similar, rents for $1700/month, because that's pretty close to the mortgage payment its owner pays the bank-- nearly $1000/month more than the cost of renting my house, which is paid for. That's the approximate difference I'd pay to "own" this house-- an extra thousand or so a month. Stated differently, I have all the access and few of the problems of home ownership for $1000/month less, renting.

If home prices here fall to the point where a mortgage payment is significantly LESS than the cost of renting, I'd consider buying property. But now? No way.

on edit-- To illustrate how overvalued house prices are, the house I rent appraised for about $140,000 in the mid 1990s. Similar houses in my neighborhood were selling for $350,000 and more by 2003 or 2004, at the height of the housing bubble, without any actual added value at all. The costs were simply inflated wildly to make higher profits for everyone concerned. That is absurd-- the equivalent of selling loaves of bread for thousands of dollars each. Without any added value, inflated home prices are just a means of enriching the real estate sales industry. No thanks!

[Bragi]

32. So NOW we should let the market work

Now that the lenders who gleefully loaned mortgage money to people knowing they were at high-risk of default have been rescued with public money, and now that the investment firms that traded in bundles of these eventually worthless high-risk loans have been made good with public money, now is the time to let the market work.

Right.