04 Nov 2008

Calculated Risk on Housing Prices

I was heartened to read this over at Calculated Risk earlier today. It’s mainly a link to a WSJ article, but the punchline is blunt:

Any attempt to keep house prices artificially high will just postpone the inevitable and delay the eventual recovery.

At least somebody seems to get it. Pity that ‘somebody’ doesn’t seem to include, oh, anybody in Washington. At least not yet, but the gist of the article is that the truth is beginning to sink in.

Unfortunately I think it’s too late for that truth to have prevented a costly and probably pointless bailout, but it might be in time to prevent too much meddling in the retail real estate market. Of all the markets that need a good cleansing burn, that’s it. However, it’s also the one prone to attracting the most interference from Congress, as idiots who forgot that a house should be a place to live first – and not an ATM or an IRA – squeal and moan as they learn that actions have consequences.

The most dangerous idea to creep in is that a decline in housing prices is, by itself, somehow bad. Whenever you see someone in a suit pointing to the decline in prices and suggesting that it is a problem to be solved, be afraid. It’s dangerous for two reasons: one, because it’s wrong – inflated housing prices were a symptom of the credit bubble, and their decline is quite natural as that bubble works itself out; two, because it’s an easy target for government intervention.

There’s nothing politicians like better than treating the symptoms of a problem; it’s so much easier, after all, than actually going after the root cause, and most of the time the public never notices the difference.

If the government succeeds in convincing the public (and Wall Street, who on the whole haven’t shown themselves to be much more savvy than the public at large anyway) that the decline in prices is a symptom that ought to be treated, and somehow find a way to prop those prices up at their inflated levels, a generation of financially responsible Americans will be effectively locked out of home ownership. I really can’t imagine anything more toxic to the long-term faith of the public in the markets than that.

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