Thursday, December 31, 2009
To paraphrase Yogi Berra, the bubble's not over till the last drop splatters. That is certainly the case with the housing bubble. Home prices that seemed to be strengthening over the summer have again slipped, according to the S&P Case-Shiller index. Neither low interest rates nor a fat tax credit for homebuyers has changed this reality.
For the record, the city that took the biggest hit in 2009 was Las Vegas, where prices fell 27 percent. Denver took the smallest hit -- prices there slid a tiny tenth of one percent.
Some worry that home prices are headed for a double dip and want Washington to do something about it. We should worry that Washington takes their advice.
First off, falling prices are not all bad. They obviously make housing more affordable. The bubble sent prices so high that people who refused to borrow recklessly couldn't purchase a home. Every now and then, the prudent deserve a reward.
The crash in house prices has helped struggling industrial states in the Midwest and Northeast to retain some of their population. New York, New Jersey, Ohio and Michigan are among the states that probably would have lost more people to the Sunbelt had their residents been able to sell their homes at acceptable prices. (The industry's unromantic term for the phenomenon is "house arrest.")
This could have some political consequences: The 2010 census will be used to reapportion membership in the House of Representatives. It won't prevent the Northern states and Louisiana from losing seats -- or the Sunbelt and Washington state from gaining them. But it could slow the transfer of political power across regions.
The bubble's not over till it's over, and there's no way to slow its disintegration that doesn't involve innocent taxpayers. The federal government may have had a valid role in stabilizing prices in the middle of the near-financial collapse of over a year ago. But those days of panic are well past.
True, one in four mortgages is underwater -- it's higher than the value of the house. Further drops in house prices undoubtedly will send more mortgages into the drink. But stocks have staged a big recovery, job losses have slowed, and consumers are more confident that the economy will improve. The good news can counter the bad.
Tighter lending standards at Fannie Mae, Freddie Mac and the Federal Housing Administration will work against higher house prices, but what should we do about that? Insist that they continue backing the sort of risky mortgages that got us into this trouble?
If Washington wants to bring buyers into the market, the simplest thing would be to announce that the hefty tax credit for homebuyers will not be renewed when it expires next spring. Everyone should also be reminded that the Federal Reserve Bank has vowed to end its program to keep mortgage rates low by March 31. That interest rates have already started climbing should stand as a warning to laid-back house shoppers of what lies ahead.
A change in consumer mentality can somewhat cushion the economy from additional slips in house prices. Much of the public has stopped regarding a house as a no-fail investment and the equity in it as mad money to be blown on every whim. The home is again a place to live, so a rise or fall in its value is chiefly the concern of those who plan to move.
The federal government's job now is to put in force new financial regulations that will prevent future sorrow. While it can't stop a bubble that's bursting, it can stop one from forming.
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