The New York Times probably represents much of the conventional political wisdom on the housing market when it asserted in a March 7 editorial that the housing market won’t come back until foreclosures stop. But the pundits are confusing cause and effect.
Housing prices are continuing to fall because the housing market was caught up in a half-decade bubble. Even without a recession, housing prices would have to drop further to come back in line with historical levels. Foreclosures are a symptom of this process, but not a cause. Complicating the process, however, is housing finance and the complicated arrangements that emerged to satisfy a demand for housing goosed by federal policy. It’s the finance component, not the foreclosure component, that is still working itself out of the market. This won’t be solved by a federal government that simply wants to rewrite mortgages and use a proverbial sledgehammer to force new mortgage writing to soak up housing supply. (My Reason Foundation colleague Anthony Randazzo’s pithy analysis from last June is still relevant.)
This creates success on paper, but doesn’t address the fundamentals. The best approach for the federal government is to create a stable financial environment and let the housing market continue down its long, if painful road, to sorting itself out.