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Home Publications Blogs Beat the Press Dan Balz and the Washington Post STILL Don't Understand the Housing Bubble

Dan Balz and the Washington Post STILL Don't Understand the Housing Bubble

Sunday, 05 June 2011 08:34

It was bad enough that the Washington Post could not see the housing bubble on the way up. As a result, it totally missed the most predictable economic disaster in the history of the world.

If anyone at the paper knew arithmetic, they would have noticed that nationwide house prices had sharply diverged from a 100-year long trend, rising by more than 70 percent in excess of the overall rate of inflation. The paper would have also noticed that there was no remotely plausible explanation for this run-up on either the demand or supply side of the housing market. They also would have noticed that rents had remained virtually flat during this period (adjusted for inflation). And, they would have noticed that the country had a record vacancy rate as early as 2002, the opposite of the shortage that would be expected if the run-up in house prices was driven by fundamentals.

Of course, since the Post's main (and often only) source on the housing market was David Lereah, the chief economist at the National Association of Realtors (NAR) and the author of the 2006 best seller, Why the Real Estate Boom Will Not Bust and How You Can Profit from It, it is perhaps not surprising that the Post managed to completely overlook the $8 trillion housing bubble that wrecked the economy. Lereah was paid by the NAR to promote real estate. The Post apparently thought that he was supposed to be providing unbiased assessments of the state of the housing market.

What is perhaps is even more remarkable is that the Post, acting like a low-IQ dog, is unable to learn from its mistakes. It still relies on the new chief economist at the NAR, Lawrence Yun, as its main source of information on the housing market. And, as Dan Balz tells us in his column today, it is still utterly clueless about the housing bubble.

Balz's complaints against the economy's performance in the Obama years is that the unemployment rate remains high and that house prices are continuing to fall. While the former complaint is a tremendous indictment of the Obama administration, the latter complaint is like blaming President Obama for gravity. House prices must decline by about 10 percent more to be back on their long-term trend. While there is no magic to the trend (prices could end up somewhat higher or somewhat lower), there is no reason to think that the end point will be higher given the enormous oversupply of housing in the country. (Vacancy rates are still at a near-record.)

In other words, anyone who understood the housing market should anticipate that the bubble will fully deflate, leaving house prices roughly at their trend level. Obama can be blamed for not doing more to help the people who are losing their homes (Right to Rent would have been a costless, non-bureaucratic route) but certainly not for the decline in house prices itself.

Furthermore, what possible policy goal is served by high housing prices? This is a redistribution of wealth from people who don't own homes to people who do, with the people owning the most expensive homes benefiting the most. It is understandable that a right-wing Republican might push for this sort of upward redistribution; it is difficult to see why an ostensibly progressive Democrat would want it. Would Balz have President Obama run for re-election on his "unaffordable housing" policy?

The big question that millions are asking is, will the Post will be able to figure out the housing bubble before it goes out of business? Place your bets! 

Comments (10)Add Comment
written by denim, June 05, 2011 10:39
Randites have no problem with "free market" re-distribution of wealth to the top or the shape of the curve that it is taking to do it. Alan Greenspan was mentored by Ayn Rand from age 25 and is definitely a Randite. But the underlying unethical behavior and misregulation of derivatives was a known train wreck* just waiting for a dip in employment to trigger it. After enough jobs were relocated offshore, that was inevitable. So all, not just some of the fault lies with the Fed and the investment financiers. Jumbo, ARM's, and liars loan mortgages were their inventions. The victims invented none of these.
*Even before Warren Buffett called derivatives weapons of mass destructions, chicken little investment newsletters were all over it.
written by bailey, June 05, 2011 12:34
I was reminded of this GREAT (& very appropriate) Upton Sinclair quote this am by FDL:
"It is difficult to get a man to understand something when his salary depends upon his not understanding it."
written by PeakVT, June 05, 2011 2:58
I think it's safe to say that the Test Prep Daily will never, ever understand the housing bubble.
written by Bruce Krasting, June 06, 2011 6:45
Dean makes an important observation in this piece. He says:

What possible policy goal is served by high housing prices? This is a redistribution of wealth from people who don't own homes to people who do, with the people owning the most expensive homes benefiting the most.

It's hard to disagree with Dean. Our efforts to stabilizing housing at unsupportable levels is a redistribution of wealth.

But if this is true, what can Dean say about the Fed's policy of QE? What was the goal of QE? To raise asset prices, most specifically prices of common stocks. There has never been a policy that has made the rich get richer like QE. The top 5% has made a bundle on QE. The other 95% has had little to show for the policy except the higher commodities prices that also come with QE.

I'm just wondering how Dean and Krugman can defend QE (and the zero interest rate policy) and at the same time blast (correctly) the policy to avoid the necessary adjustment in housing values.

We all went it both ways. But we never get it. Dean can't have it both ways either.
written by Eric, June 06, 2011 7:38
I'm continously surprised at the interest expressed in such concepts as "Right to Rent". If a borrower has a non-recourse mortgage, they already have the right to default and walk. Non-recourse means exactly that: the borrower is done with the loan. The hit to credit scores is substantial, but the credit business needs customers and there will be a great deal of understanding that it was "just a business decision". If you love your current housing situation, but it is a struggle to make the nut - well that's your struggle and your decision to make.
written by Jim A, June 06, 2011 7:39
Bruce, you're absoloutely right. Both equity and RE prices are a zero-sum game. For every extra dollar that a seller receives, the purchaser has to pay an extra dollar to recieve the benefit of either housing or future dividends. I just can't get my head around why higher prices are somehow regarded as an unmitigated good in either asset class.
written by Moopheus, June 06, 2011 8:10
"The Post apparently thought that he was supposed to be providing unbiased assessments of the state of the housing market."

This is probably not true. I'm sure the Post's writers knew exactly what the NAR stood for, but since it dovetailed with their own positions that was okay. Also, newspapers tend to be pro-homebuying since it's a big ad generator for them. When guys like Balz complain about falling home prices it reflects, I'd guess, a lot of anxiety concerning their own investments in their suburban homes.
Another WaPo doozy ...
written by Benedict@Large, June 06, 2011 7:33

I don't suppose you caught that other WaPo piece this last Friday, "What is a college education really worth?" A rather lengthy piece all about how kids in elite schools are wasting their parents' money taking gut courses.

Now, if I'm not mistaken, doesn't WaPo's parent company make all their money offering alternatives to formal education?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.