Wednesday, October 15, 2008
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 PricesGeez! Martin Feldstein and Chris Mayer.
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.
Falling 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.
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.