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Let the Market Fall



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According to this New York Times piece, many people now think the government must stop rolling out programs to prevent the housing market from collapsing. I agree, but then again I was against propping up housing prices in the first place.

Besides, these policies do not seem very effective: Housing sales sank 26 percent from July 2009 to July 2010. And it’s not for lack of trying:

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.

One of the very interesting aspects of the Times article is that it lists the people who stand to lose from a serious drop in prices: “the tens of millions of homeowners who have already seen their home values drop an average of 30 percent,” builders, the banks (millions of owners are just hanging on and might default on their mortgages), taxpayers (they are on the hook for mortgages that were guaranteed by the government), and the administration, which gambled on a recovery that is not happening (not much sympathy here). I would add to that list real-estate agents.

The winners, the piece argues, are the renters who could buy if prices dropped.

Tyler Cowen has mixed feelings about it:

Yet what happens if we let them fall? Arguably many banks would once again be “under water.” Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.

I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck. Housing prices must fall, yet . . . housing prices must not fall.

I don’t see how we can continue the charade of government policies to prevent the inevitable. We must let the market clear. We’ve tried everything else. And while there is a risk, nothing can prevent it.



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