The Corner

The New York Times Misreads the Housing Market

The New York Times editorial board chimes in to today to egg on the Obama administration to goose the housing market:

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

Instead of pushing the banks to do what is needed, the Obama administration has basically urged them to do their best to help, mainly by reducing interest rates for troubled borrowers. The banks haven’t done nearly enough. In many instances, they can make more from fees and charges on defaulted loans than on modifications.

If only the solution were so simple! True enough, the housing market is in a bona fide depression. But the fundamental problem with the housing market and the national economy isn’t foreclosures. It’s that we built too many houses with easy, suspect financing during the housing bubble. It’s going to be a very long time before the housing market sorts itself out, and a big chunk of that adjustment will be families who are “underwater” holding on, fulfilling their debt obligations, and engaging in a household finance reset. Even if they get out from under their mortgages, I doubt we will see a boom in consumer spending that leads us out of our version of a “lost decade.”

Right now, the housing market is struggling with a housing finance conundrum, but we shouldn’t delude ourselves into thinking that solving this part of the problem will bring the housing sector back. It won’t. Regardless of what we do with foreclosures, we still have to deal with the oversupply of housing that accompanied the boom. Only when supply is brought back into balance with demand will the housing industry recover.

The problems with the national economy go far beyond the housing market. Misguided and poorly targeted fiscal stimulus programs, low interest rates driven by policy rather than market fundamentals, a booming debt, the looming insolvency of the nation’s major entitlement programs, a White House that doesn’t seem too concerned about the disincentive effects of high taxes, and gridlock on major infrastructure strategies are all contributing to a general malaise and dampening of private investment and entrepreneurship. Selling a few more houses isn’t going to address those problems.

— Samuel R. Staley is associate director of the DeVoe L. Moore Center at Florida State University and a senior research fellow at the Reason Foundation.

Samuel R. Staley — Mr. Staley is director of urban-growth and land-use policy at the Reason Foundation and teaches urban and regional economics at the University of Dayton.

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