The Politics of High House Prices

It’s probably not that our Government doesn’t understand the housing’s problems, but that addressing them isn’t politically palatable. Home prices are going to find their eventual bottom, no matter what the interest rates or homebuyer tax credit may be. And, all of the foreclosures that need to happen, eventually will – it’s a question of when.

Allowing home prices to fall might anger voters in the short term. But, as soon as prices hit bottom, there is nowhere to go but up. Optimism, and the consumer spending that accompanies it, can return. Moreover, if homebuyers in 2011 and 2012 spend less on housing, they can spend more on other things. Bad for banks perhaps, but good for the rest of us.

On the other hand, by continuing to extend foreclosure timelines and pretend the problem doesn’t exist, home prices would be relatively more stable in the short term. However, as long as the eventual bottom is postponed, so too is the day when real, organic, unstimulated optimism can return.

Home Prices are No Mystery

Consider the classic Shiller graph of home prices, adjusted for inflation. Here is that graph with an update by Barry Ritholtz:

It doesn’t take an MBA to see that national home prices are still far beyond their normal range. Given that consumers are carrying more debt than ever and that the economy is just plain lousy, it stands to reason that prices should be even lower than average. Economically, these are certainly lower-than-average times.

How and when home prices fall is up for debate. But eventually they will revert to the trendline. (That’s why they call it a trendline.)

On Political Obstacles

Kudos to Dean Baker for this New York Times contribution Pierce the Housing Bubble

Virtually the entire economics profession insisted on ignoring the housing bubble as it expanded to ever more dangerous levels. Remarkably, even after the bursting of this bubble wrecked the economy and has given us the worst downturn in 70 years, most economists are still determined to ignore the bubble.

…

Trying to delay this adjustment process with schemes like the homebuyers’ tax credit were a pointless waste of money. Our government got millions more people to buy homes at bubble-inflated prices, ensuring that many will lose money when they sell. That is not good policy. Trying to sustain a bubble in the housing market is like having an agricultural price support program, except it is far more costly with far less benefit.

The housing bubble did support the economy prior to the recession. We will have to find alternative sources of demand to replace the demand generated by over-valued housing.

It is actually easy for economists to think of ways to generate demand. We can have public jobs programs, we can rebuild the country’s infrastructure, we can have tax cuts oriented toward low and middle-income people who will spend the money quickly.

We can also have the Fed be more aggressive with its monetary policy, targeting an inflation rate in the 3-4 percent range. We should also push down the value of the dollar to get our trade deficit down to a more reasonable size.

Unfortunately, all of these policies face serious political obstacles in Washington. However, the job of economists should be to explain the problem to policymakers and the public and to berate those who seek nonsense solutions like re-inflating a housing bubble.

When Social Mood Changes Enough…

Maybe that’s how all of this will end. Maybe, eventually, enough of us will get mad enough and tired enough and simply demand that the charade ends so that we can get on with out lives. Eventually protests could turn to riots as social acrimony spreads and perhaps at some point our politicians may get it:

It’s not high home prices that will get them re-elected, it’s that light-at-the-end-of-the-tunnel – the mass optimism that things will get better.

And right now, that light is pretty dim.