By Randall Holcombe • Wednesday August 25, 2010 10:55 AM PDT •
Five years ago, as the housing bubble was ramping up, affordable housing was a big issue. Today, as housing prices have fallen after the bubble burst, I may be one of the few people who thinks housing prices are still too high. [Also see the recent book, Housing America: Building Out of a Crisis.]
You have likely seen the news that there was a big decline in home sales in July. Economists should think that if the quantity supplied (of anything, including housing) exceeds the quantity demanded, that is an indication that prices are above the market-clearing level, and should fall.
One factor keeping housing prices up is federal government policy. It is not surprising, for example, to see a big decline in housing sales in July, after the federal government’s tax credit program for new home buyers expired. The government’s mortgage refinancing initiatives, the Fed’s purchase of toxic mortgage loans, the propping up of Fannie and Freddie, all have supported house prices.
We shouldn’t be supporting house prices; we should be letting them fall to their market-clearing level. To do otherwise will just prolong the period of adjustment and delay recovery.
If we are really concerned with providing Americans with affordable housing, the lower housing prices fall, the better.
Certainly, falling house prices have hurt lots of people. Some financial institutions made some bad decisions investing in the housing market, but fate of those financial institutions is a peripheral issue. Speculators and house flippers found that their business models that worked during the bubble hurt them during the bust. Should public policy prop them up?
Ordinary homeowners have been hurt less, or maybe not at all. If they bought a house as a residence, they agreed to make a monthly mortgage payment in exchange for living in their residence, and that hasn’t changed. If the housing bubble hadn’t burst, they would be living in the same home, paying the same monthly payment. It did, but their residence, and their monthly payment is what it would have been without the collapse, even if they now find themselves “underwater.”
What about people who have to sell their homes? Of course this is a problem for people who bought more home than they could afford, but as noted already, that problem is largely the result of government policy. Let’s not keep making the same mistakes by supporting housing prices.
Keep in mind that every time a house is sold, it is also bought. The seller who sells at a low price sells to a buyer who buys at a low price. The disadvantage to the seller is offset by an equal advantage to the buyer, so on net that is a wash. And, if we really were concerned about affordable housing, the balance, from a public policy standpoint, might tilt to favor buyers who can now buy at lower prices.
People who have to sell because, for example, they are changing jobs and moving to a new community, will be minimally impacted. They have to sell their existing house for less, possibly for less than they paid, but they have the opportunity to buy another house for less too.
People benefit when the things they want to buy are less expensive. That applies to houses as much as to computers. And we still have too many policies that keep housing prices up, like zoning and other land use regulations, and building codes.
Meanwhile, we have a host of short-term policies to try to prop housing prices up. They are counterproductive. We should let housing prices seek their market-clearing level, which indeed will leave speculators, some financial institutions, and some homeowners financially worse off, but at that point the housing market can start to recover, and be a boost to economic activity rather than a drag.