Photo: Wikimedia Commons
The NYT’s editorial on housing policy makes it sound like it expects the Nasdaq to return to its 2000 peak of 5000. The NYT wants more action on housing in order to get prices to rise and boost the economy. There is so much that is wrong about this view, that is difficult to know where to begin.At the most basic level, why on earth would we expect house prices to rise? Has the NYT still not noticed the housing bubble? There was no logic to the run-up in house prices over the years 1996-2006.
This run-up was a break from a 100 year history in which nationwide house prices had just tracked the overall rate of inflation. There was nothing in the fundamentals to support this run-up as was demonstrated by the fact that rents only slightly outpaced inflation in the first half of this period and not at all in the second half.
At this point, the bubble has now largely deflated so that prices nationwide are within a range that can be viewed as consistent with their long-term trend. In some areas (e.g. Los Angeles, New York, San Francisco) the bubble still has some air that is likely to continue to dribble out. In other areas (e.g. Los Vegas and Phoenix), prices have probably over-corrected on the downside leading to some eventual rebound, but there is no reason to expect a nationwide increase in house prices. Furthermore, with nationwide vacancy rates still near record highs, how can the NYT seriously expect any substantial increase in house prices any time soon?
This brings up the next question, what exactly does the NYT expect higher house prices to do for the economy? In the bubble years, high house prices led to a near record building boom. Does the NYT think we will see a huge uptick in construction at a point where we still have vacancy rates near record highs?
The other part of the story was the consumption spurred by what proved to be illusory housing wealth. If we did get house prices up again then there is no doubt that it would lead to some additional consumption (the usual estimates are 5-7 cents on the dollar), but this seems a rather perverse way to try to generate demand in the economy.
Essentially higher house prices transfer claims to wealth from non-homeowners to homeowners. The higher house prices go, the more wealth homeowners can command and the harder it is for non-homeowners to become homeowners. (This is known as the “unaffordable housing” policy.) If we just want someone to spend money, wouldn’t a refundable tax credit do the trick better? Or, as more long-term policy, how about getting the dollar down and thereby boosting net exports?
While it is difficult to understand how the NYT thinks that housing policy will affect the economy, its agenda does make sense as housing policy. There should be pressure on banks to do more to modify loans to keep people in their homes. Of course having some sort of national right to rent policy would make the most sense, but hey, that would require some new thinking.
We should also be moving ahead with investigations with the purpose of prosecuting fraud. There were a lot of mortgages made in the bubble years that the issuers knew to be based on inaccurate information. This had to have been a matter of policy at the major subprime issuers. These mortgages were packaged into securities by Goldman Sachs, Merrill Lynch, Citigroup and the other investment banks and then resold around the world. Knowingly packaging and reselling fraudulent loans is also fraud.
The people at the top responsible for these actions badly need to be prosecuted and jailed. Our financial markets will not be safe until this happens. On this score, the NYT editorial is right on the mark.
Read more posts on CEPR »