The Corner

Mortgages

Ramesh, looking at your correspondent’s comments, I think that there are a number of points worth making:

1981-83: when we look at the performance of the housing market in those years, take a look at interest rates. Prime lending rates were at 20% on January 9th, 1981, falling to 11% by the end of 1983, something that would have mattered far more to housing prices than any changes to tax rates.

Leverage: your correspondent is ignoring the distinction between debt and equity. Take a simple example: If the value of a house falls from $500,000 to $400,000 it sounds bad, but not too bad, but that $500,000 is a largely irrelevant number. Far better to look at the equity in the property. It’s quite possible that the $100,000 fall will wipe out all the equity that the homeowner has in his house – and that is the number that counts.

Not going to move: but so what? A classic consequence of falling prices is falling liquidity. Owners may not want to sell, but if the nominal value falls, the consequences in terms of consumer and lender behavior are pretty much the same: disastrous.

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