Thursday, March 06, 2008
On the one hand, an increasing number of observers are coming to the increasingly unpleasant conclusion that real estate prices have to come down before order can be restored to the U.S. financial system and an economic rebound can take hold.
On the other hand, an the increasing number of observers are coming to the increasingly unpleasant conclusion that real estate prices can't be allowed to go down if order is to be restored to the U.S. financial system and an economic rebound is to take hold.
You can't reconcile these two views.
Is anyone even trying?
Shouldn't someone be trying?
A couple examples from earlier today help to frame the issue. Writing in the Washington Post, Robert Samuelson notes:
Home prices are tumbling. We're bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.Offering the opposing view, Boston Fed President Eric Rosengren comments:
From 2000 to 2006, median family income rose almost 14 percent, to $57,612. Over the same period, the median-priced existing home increased about 50 percent, to $221,900. By other indicators, the increase was even greater.
But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have been tightened, and the (false) hope of perpetually rising home prices -- along with the possibility of always selling at a profit -- has evaporated.
"As long as housing prices continue to fall, the decline increases the risks to borrowers, lenders, markets and the economy," Rosengren said in prepared remarks to the South Shore Chamber Economic Breakfast in Quincy, Massachusetts. "Significant further declines in home prices could greatly complicate efforts to resolve current problems."The closest we've come so far to reconciling these two views is the idea above - where lenders reduce homeowners' principal so that as home prices go down, they'll be a little less eager to walk away from the property because they'll be a little less upside-down in their mortgage which, of course, will only forestall the inevitable market-based correction.
Rosengren joined Fed Chairman Ben S. Bernanke this week in warning about the rising threat of negative home equity, where property prices drop below mortgages.
"Lenders could write down the loan amount to the current home value, cap losses, avoid the costs associated with foreclosure, and receive a share of any future home appreciation," Rosengren said.
It would be nice to hear more observers ask, "You know, we really can't have an entire economy that is based on blowing one asset bubble after another because, once the bubble pops, the asset prices drop like a rock causing all sorts of problems. How do we fix that?"