Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says.Again, encouraging people to buy houses at inflated prices is harmful to home buyers. It's harmful when banks do it and it's harmful when the government does it. When it's done with low down payments (such as the FHA's 3.5%), it's risky to the entire economy because many people can easily end up underwater.
Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come. ...
“As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.”
Thursday, January 28, 2010
Yes, Virginia, there is still a housing bubble
Dean Baker, the first economist I'm aware of to spot the housing bubble (although he was still a year-and-a-half behind me), says we've still got a housing bubble and the government isn't helping people by encouraging mortgage lending: