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Thursday, October 09, 2008

Housing needs to go lower


We need not higher home values, but lower home values.

"Affordable housing" would mean Americans would be spending some normal percentage of their income on housing. There's still more bubble left because housing is still high relative to income or where it was in 1987-2000 adjusted for inflation. See, for example, the graph here of the National Home Price Index from Nobelist Vernon Smith's article http://online.wsj.com/article/SB122351051370717359.html

Left to its own devices, the market is heading there. The question in the current crisis is how to let the market do what it wants to do (deflate housing costs) without large collateral damage.

I don't have a magic wand to do that. But I do know if you ask the wrong question, it's hard to get the right answer.

If we keep thinking about this crisis from a perspective of stabilizing home prices at some artificially high level -- isn't that doomed to fail?