On Wednesday, the New York Times lamented the continuing stagnation of the housing market and predictably editorialized that the feds should jump in to right the ship, otherwise the economy won’t recover. Specifically, the editors asserted: “Selling and building of houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse. Since the problems in housing are not self-curing, a government fix is in order.”
While I believe the housing market is in a depression — a prolonged period of decline and stagnation — the entire economy isn’t imperiled by this, nor is the government going to be the solution. The economic problem isn’t that houses are in foreclosure. The core problem is that we the housing market was caught in a price spiral aided and abetted by national policies that drastically rigged the mortgage market to accept unsustainably risky home mortgages and local planning policies on the coasts that restricted supply. It’s going to take a long time for the market to sort itself out, regardless of what the government does.
True enough, the high rate of foreclosures is a drag on the economy and is making it difficult for markets to fully clear. But, it’s also true that the worst is likely behind us. The problem isn’t getting foreclosed homes on the market. Rather, it’s re-centering the home mortgage industry in a more realistic economic setting, unhampered by government policies that distort incentives to borrow money to buy homes.
Right now, the housing market doesn’t need the government to step in and monkey around with mortgage regulation based on the government’s policy priorities. Rather, we will be better off letting the home mortgage market and banks sort it out for themselves in a way that protects their assets. That’s going to take a while and very little can be done to jumpstart it.
Similarly, the most important thing for the economy more generally is to get more Americans back to work in high-end services, manufacturing, and innovation-based industries so that we improve productivity, rejuvenate household incomes, and spur the export market. The housing market will follow.
— Samuel R. Staley is Robert W. Galvin Fellow and Director of Urban & Land Use Policy at the Reason Foundation.