Unfortunately, all of this hand-wringing tends to distract from the essential truth about soaring home prices, which is that they are a bad thing. So before you become carried away with mourning, let me break the news: the housing bubble never loved you. The bubble is not even your friend. In fact, the very best thing you can say about the passing of this particular bubble is "good riddance.""What's so bad about skyrocketing home prices?"
- "hey make life awfully difficult for people who aren't already homeowners"
- "and do little for people who are, because selling one inflated house only to buy another affords little profit"
- "It's true that mounting home equity makes for a nice piggy bank, but it probably also suppresses other kinds of saving and encourages excessive debt"
- "it has helped addict global producers to American consumerism, because it gives Americans the confidence - and in many cases the wherewithal - to spend some of the inflated value of their homes"
- "Sky-high home prices also divert too much capital into home building from potentially more productive uses. And these prices fuel risky, not especially useful speculation in residential real estate."
Finally, wouldn't it be better for society, and safer for our financial system, if people could buy a home without resorting to the kinds of loans - with deferred amortization, for example, or scant down payments - that are risky for borrowers and lenders alike? Al Mansell, president of the Realtors' association, noted recently that the median down payment by first-time home buyers was just 3 percent, down from 10 percent in the early 1980's. He added that a quarter of first-time buyers who did make down payments used gifts from their parents. But more than 4 out of 10 put down no money at all.
But if inflated home prices are bad, isn't the end of a housing bubble worse? Not necessarily. There is always pain associated with market adjustments. But as the economist Herbert Stein once dryly observed, if something cannot go on, it will stop
My sense, though, is that home prices appear determined to fall, at least where they are most inflated. And having them fall sooner imposes lower costs than having them fall later, while delivering immediate benefits.If prices moderate, maybe we won't gobble up open space as quickly. Lower prices will clearly deter some speculators, who will put their money to work elsewhere. And some of those real estate brokers will find something else useful to do
Great column Daniel. I totally concur you with your sensible opinions regarding the housing bubble.
Note: Hopefully this afternoon I will have chance to check out some open houses. It is a lovely day in DC area. I'll take my bike for a ride and check out some houses.