David Streitfeld in the NY Times gets around to a topic I've addressed multiple times on these virtual pages already: letting home prices fall to afforable levels which will attract new buyers.
"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.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve."
As I said, I've written about this before, so I don't feel the need to dwell on it, but needless to say, I agree that home prices should be allowed to settle to their natural levels.
-KD
disclosure: long a home
16 comments:
all they can do it extend & pretend, but reality will catch up eventually...here's a 120 year chart of home prices adjusted for inflation; we still have a long way to go to get to the historical mean...and with with 76% of new jobs being created in this recession paying less than $15 hour & the median home price still north of $190,000, there wont be many of these newly re-employed being able to afford homes at those prices...
two adults employed @ $15/hr = 60k/year pre-tax.
they could _easily_ make a $1000/month mortgage, which is about what you would pay on a 160K loan (190K with 30K down).
should they let the banks fail too? i would like to live in a world where markets set prices etc. but that is not this world. i bet you supported the bailouts in 2008, right?
and - with all due respect and without knowing your situation - i bet you are flat or more likely short of house. do you have extra houses? how does your current house compare to the house you'll have in 5-10 years?
no offense. i love your blog. just calling bs on the post.
anon @9:44: KD already said he's long a home...
my full disclosure: long a house i paid a realistic $18,000 for in 1972...my entire family also long & paid off...
if you own the house you need to live in, then you are flat.
anon @ 9:44am: if you're going to waltz in here and start lobbing bombs, you should make sure they are accurate. I said right in this very post that i'm long a house. I have no financial interest in talking down the housing market. I would hope that in 5-10 years the house I have is the same one I have now.
as for the bank bailouts, you can go back to september 2008, read my archives, and see exactly how I felt about them (hint: I was OUTRAGED)
i think you're making a common mistake though, and that's another one of entitlement - just because the gov't fucked up with the bank bailouts doesn't mean they should compound that fuckup in perpetuity and bailout everyone else too. although that's what people feel entitled to, which is yet another reason the bank bailouts were such a huge mistake - it's not moral hazard for the banks - it's moral hazard for EVERYONE
i'm not going to get into a silly semantic argument with you, but if you own a house, you're long housing. if you don't own a house and want to buy one at some point, you're short housing.
i don't know how anyone can be "flat" housing - maybe if they do not and never intend to own a house.
anon, yep, i live in my house, and everyone in my family lives in a house that they own...isnt that what houses are for, to live in?
no. you are long a house if you have one to sell. if you do not need to buy or sell a house, you are flat. if you rent, you are short. you would benefit if rents declined.
i am not surprised you were opposed to the bailouts. i was too. Asness made a nice argument, which i'm sure you saw.
i was not suggesting you would or could talk down house prices from your blog. just saying they would not fall in isolation. the economic collapse that would accompany a further, say, 25% fall in house prices would see winners and losers, and a political system unable to bear the pain of failing banks and rising unemployment.
@ Anonymous (10:21am)
You do of course realize that being long or short doesn't related to accounting-type psychological treatment of assets right? As in shifting of mental accounts from 'Available for sale' to 'Assets held to maturity' has no portfolio consequences on whether you have long or short exposure to an asset.
Not to entirely front-run Kid's inevitable response, but long/short of course relates to risk exposure, which is not neutral unless you've hedged the value of your home in your portfolio (on most unique assets sharp hedging is hard to come by). Whether or not you want to sell, your net worth will be at risk if you own a house, and thus have long exposure to housing.
huh? why would corporate securities accounting be relevant to the situation of a guy living in a house with his family? you are leaving the obligation to secure indoor living for self and family off-balance-sheet. for the normal guy owning a house appropriate to his productivity, the position is pretty well-hedged. that guy is flat housing - in economic terms.
anon - i agree with UrbanAnalyst. the key is this: "Whether or not you want to sell, your net worth will be at risk if you own a house, and thus have long exposure to housing."
your claim "for the normal guy owning a house appropriate to his productivity, the position is pretty well-hedged. that guy is flat housing - in economic terms" has me wrinkling my eyebrows in confusion. If you own a house "appropriate" to your productivity, and the economy tanks, you lose your job, and your house price plummets (wait - didn't this JUST happen???) - you're not even close to hedged. In fact, we call that the Texas Hedge - it's double long. you get whacked on both sides - the job (which you no longer have) and the house (which you can no longer afford, AND is now worth much less.
that's why it was a bubble! house prices (and quantities!) started to imply an unreasonable level of future prosperity. "no longer afford.." means never could afford. people will err, but in the last 10 years the whole society erred.
the hedge i refer to is long house against need (short) to live indoors - not against your job. most people will, if they lose their job, get another job somewhere else. sure - people will need to move on short notice, people will have liquidity problems.. but it is not necessarily easier to deal with such one-offs as a renter, is it?
anyway, i stand by 3 things - 1. owning your house makes you flat (though i see your point). 2. this post has slack-jawed reason ing- house prices can't correct in isolation. 3. great blog, keep it up.
i've actually said just that:
""no longer afford.." means never could afford."
many times... I agree.
economist nick rowe on house prices:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/09/the-house-price-fairy.html
Kid.... Amen brother...let the sucker crash and new money will emerge to take on the obligations.
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