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

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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!