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Home Publications Blogs Beat the Press House Prices Will Fall Because They Are Over-Valued

House Prices Will Fall Because They Are Over-Valued

Saturday, 03 July 2010 07:07

It is absolutely astounding that so many reporters at major news outlets apparently have not heard of the housing bubble. This is like people not knowing about the risk of war after the United States had been attacked at Pearl Harbor. Surely such people existed, but you would not have expected them to be writing at the New York Times.

The NYT has a lengthy article today discussing Illinois' severe budget problems in the context of the deficits hitting several large states. At one point, it tells readers:

"Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further."

House prices in these states have only partially corrected from their budget-inflated levels. They remains substantially above long-term trends. In all three states there are extraordinarily high ratios of price of house prices to rents. It is virtually certain that house prices will fall further regardless of how these states deal with their budget problems. (Interestingly, California is using hundreds of millions of dollars to temporarily prop up its house prices. Presumably, it will end these subsidies once its budget crunch gets too severe.)

At this point, reporters should be familiar with the housing bubble and know something about its general dynamic. Its collapse led to the largest downturn in 70 years. This is a big deal.

Comments (2)Add Comment
written by izzatzo, July 03, 2010 9:21
So deflation is a bad thing that creates unemployment. Check.

No wait, deflation is a good thing, but just for houses. Check.

But deflation is also good for health care because otherwise it will bust the budget. Check.

Stimulus spending that runs up the deficit and debt is good for the economy. Check.

Free markets work and they're trying to work now and bring down house prices but the government won't let them and journalists think housing markets need more demand to keep prices up which is good for the economy. Check.

Go back to step one. Deflation and recession is not a bad thing. Deflation increases the future value of monetary assets lent in the current period with the exception of homeowners, while recessions and unemployment are healthy self-correcting responses to excess government debt. Now tie everything back to this and the rest of it will make sense except stimulus spending. Check.
written by Queen of Sheba, July 03, 2010 7:06
Why in the world would CA be using what precious little money it has to prop up housing prices?! The only reason I can think of is that the state collects more money in property taxes on houses with higher values. But that makes no sense either. I'm at a loss.

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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.