The Key to Stabilizing House Prices: Bring Them Down
December 2008, Dean Baker
This report states that bringing about the rapid adjustment of house
prices to trend levels is the best means of returning stability to the
housing market. The paper also calls for the restriction of GSE capital
in bubble-inflated markets, with the intent of forcing house prices in
these areas to return to trend level. The removal of capital from
bubble markets and the consequent infusion of loans into non-bubble
markets would stabilize prices in these areas, thus preventing a
downward price spiral and overshooting of trend-level prices on the
negative side. The report also advocates mortgage appraisal based on a
price-to-rent ratio of 15 to 1. As well, the paper suggests giving
families facing foreclosure the right to rent their homes both to keep
them in their houses and offer banks real incentives to avoid
foreclosure.
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