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Another 'Root Cause' That Isn't: Tumbling Home Prices

by: Tim Iacono October 15, 2008    

Tim Iacono

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Just in case the economy needs any "piling on" at this juncture, Ruth Simon and Michal Corkery provide it in this (free) report at the Wall Street Journal on tumbling home prices and the absence of even more government bailouts to prevent even more price declines.

[Only a small portion of the content at WSJ.com seems to be behind the subscription wall these days - are they headed toward an "all-free" online model as rumored last year?]

Anyway, Ruth and Michael badly miss on their "root cause" argument and their selection of interview subjects could be much improved, but, they have a really nice graphic showing how, in some parts of the country, home prices are falling as fast as stock prices.

No Quick Fix for Housing Prices
The Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices.
...
But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein.
...
Nationwide, house prices have fallen 18% from their peak in the first quarter of 2006, according to Case Shiller. By another measure, from the National Association of Realtors, home prices are off 12% from their peak. They are expected to fall an additional 10% to 15% between now and mid-2009, says Mark Zandi, chief economist at Moody's Economy.com.
IMAGEFalling prices are feeding a vicious cycle that leads to more mortgage delinquencies and foreclosures. As more Americans end up "under water," or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
...
Chris Mayer, vice dean of Columbia Business School, says the government should push mortgage rates down to 5.25% in order to spur demand. Prof. Mayer has proposed that the government refinance homeowners who live in their homes, can document their income and show they can afford the new mortgage. When borrowers owe more than their homes are worth, he says, the government and the mortgage holder should share the write-down in equity when the loan is refinanced.

Geez! Martin Feldstein and Chris Mayer. You know we're still a long way from a bottom in the housing market when these are the kinds of solutions being offered.

Maybe we should just let housing fix itself. That is, allow home prices to find their natural market level and then start over again.

Last week's op-ed by Feldstein was really shocking - see Feldstein lays an egg - and Chris Mayer has appeared in these pages off and on over the years.

Remember Money Magazine Does a One-Eighty from a few years ago? Mayer was the lone voice of optimism in a piece that signalled the peak in the housing bubble in late-2005.

At the time, Mayer was still peddling his theory that home prices in big cities were justified for a variety of factors that, in hindsight, were all quite delusional.

Not surprisingly, the paper can longer be located, but an interview is still up at Money Magazine - Big Cities, Bright Prospects.

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This article has 6 comments:

  •  
    Oct 15 09:03 PM
    for sure this crisis will not be over until housing prices stabilize at a level the market accepts. if the government intervenes too much the market will stabilize at the wrong level and we will prolong this crisis. if the government does nothing, the market will over correct and will hurt a lot more people.

    we are currently doing nothing........ this is the wrong answer.
    Reply
  •  
    Oct 15 10:35 PM
    Falling house prices are good: every year young people enter the housing market. They can't afford the current high prices.
    Reply
  •  
    Oct 16 12:54 PM
    Too many are confusing the core problem as FALLING housing prices, rather than INFLATED housing prices. Painful as it may be, the healthiest thing for the economy is a more sustainable housing base. I'd rather have a painful couple of years, some portions of the homeowners getting washed out (remember, non-recourse loans mean they just lose what they had in "equity") and from the ashes will rise a sustainable economic engine.

    While I'm on my soapbox, in the next gen economy, it'd be swell if we'd begin to focus more on the *productivity* than the *consumption* of our economy. As painful as it may be to swallow, no country maintains wealth by leading the world in consumption. Long run wealth is measured by how much value you create and deliver to your citizens and the world. The writing on the wall came shortly after the tragedy of Sept 11th when our government's call for action was "go shopping!". This is a sure sign that we've become slaves to the consumer, their fragile confidence, and their ability to consume more than they produce. Sad...
    Reply
  •  
    Oct 16 02:54 PM
    Tim: Good article.

    Belvedere Research: Well said, I agree.
    Reply
  •  
    Oct 16 03:08 PM
    Belvedere Research..... You mean Carly Fiorina and Kudlow are wrong??? Are you saying we shouldn't be sending all our production overseas??? Seems .. Well almost Democratic left coast!!!

    jegan ;-)

    GOP for Obama
    Reply
  •  
    Oct 22 03:15 AM
    Oil is falling in price, why don't we stop that and return to $4.00 gasoline?

    Are you people retarded?
    Reply
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