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Home Publications Blogs Beat the Press House Prices Still Have More to Fall, Deal With It

House Prices Still Have More to Fall, Deal With It

Friday, 03 September 2010 04:35

The NYT has long opposed agricultural price support programs. Ironically it supports house price support programs. It seems to want the Obama administration to take further steps to keep the housing bubble from deflating.

The basic story is that house prices are still 15-20 percent above their trend level. These prices seem relatively affordable given the extraordinarily low interest rates in the market at present. However, if we think that interest rates are a major determinant of price, then we must believe that prices will plummet if interest rates return to a more normal level.

Sound housing policy would accept the fall and focus on helping homeowners facing the loss of their home. It would not try to perpetuate the bubble.

Comments (8)Add Comment
Insular Dean
written by scott, September 03, 2010 5:21
Prices are actually mixed and rising in many sectors. In Burbank prices are up since the boom. Prices are rising in 18 markets and stabilizing in 18. Meanwhile, China has again expressed discontent with their dollars holdings. One note Charlies can be right till they are wrong. You are missing much positive data, perhaps you too are under the sway of Wall Street traders who certainly seem to have shorted the economy.
written by Ron Alley, September 03, 2010 7:10
This article misses the most important point.

Residential real estate industry is a personal services industry. The purpose of the residential real estate industry is to provide shelter for the population necessary to provide labor for economic activity at specific locations. Growth in the residential real estate industry (and price growth of homes) is produced by growth in population and growth in wages. Decline in the residential real estate industry is caused by declines in population and wages.

The decline in home prices is due to the decline in employment -- both jobs and wages. Consumers won't buy homes unless they have a job, sufficient income to afford a home and confidence in continued employment. The housing credit worked by adding a small measure of income -- just enough economic assistance to induce a small segment of the population to make the decision to purchase a home.

The crisis is not a decline in home prices but the decline of jobs and wages. When the politicians go to Detroit and tell the population that their jobs aren't coming back and those who remain employed can expect a decline in their wages, they are telling the people of Detroit that employment and wages will cause a decline in the residential real estate industry in Detroit.

The systemic error is to view homes as assets rather than as services. When we see ghost towns we see the extreme case of localities that once had sufficient economic activity to support a population and its attendant residential real estate industry but now have little if any economic activity. When we see blocks of abandoned homes in Flint and Detroit, we see localities where the economic activity has declined severely but remains strong enough to support a smaller population and a smaller residential real estate industry. The abandoned homes are remnants of a diminished residential real estate industry just as the abandoned plants are remnants a diminished automobile industry. In the extreme cases the nature of residential residential real estate is readily apparent.

The sad truth is that we can address the residential real estate only by addressing wages and employment.
Once no one wants to buy a house a bottom begins to form.
written by Scott ffolliott, September 03, 2010 7:49
"The basic story is that house prices are still 15-20 percent above their trend level."

It seems very probable that the housing prices shall fall below that trend level before they again rise to the trend level. Once no one wants to buy a house a bottom begins to form.
Ron, let me add
written by scott, September 03, 2010 8:42
the deregulation of utilities has exacerbated this trend by taxing, for private gain utilities. One can find a correlation between electricity costs and home values, in conjunction with your astute comments.
Wait, What?
written by Paul, September 03, 2010 9:39
Because the NYT opposes Ag subsidies it should also oppose housing subsidies?

Aren't you ignoring the facts about our Ag industry? Let's see, our strongest exporter, most productive and most stable industry should be radically changed to a "free market" system where prices gyrate unpredictably and farmers are constantly operating on the edge of bankruptcy? Yeah, that makes sense. I wonder why FDR changed it?
Free Mkt
written by James, September 03, 2010 12:20
WSJ and NYT have long advocated free market and let the market forces determine the price, demand and supply. If housing or agr. cannot support their operations/businesses, they should fail or drop in prices.

If an auto worker or textile worker cannot find jobs due to a lack of demand of jobs, they should find something else to do or get re-training, not needing permanent gov't subsidy, right?
Is that 15-20% everywhere?
written by LJM, September 03, 2010 4:48
The coasts had the bigger bubbles in terms of housing. In Kansas, where I live, the bubble wasn't as big. In my neighborhood, there wasn't a bubble at all. So are you saying I should expect my house to decrease in value the same as someone in L.A. or S.F. should expect ?
LJM Good Point
written by scott, September 03, 2010 7:20
I live in Dallas, in Texas generally we are unaffected by the housing bubble as well, prices stagnated a bit but fell only minimally. Even in Burbank CA, prices are now above their bubble highs, so, not all of CA is hurt. SF likewise is probably doing fine, thank you. The middle class and lower classes are indeed hurting. But Dean is out East, with the cry baby CEO's and gov't lackeys, prices there are steady too. The Rust Belt, Fla, and part of AZ and NV are hurting the worst.

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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.