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Let the Housing Market Crash?

This weekend, the New York Times featured an unusual story on housing. Its argument goes like this: The government has done a lot to ensure that home prices do not slide too precipitously. But houses are still too expensive — and if the government were to pull its interventions, prices would drop, ginning up sales.

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live. As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve. “Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

[...]

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

This is all a little weird. First, the plunge in home sales was not really “unexpectedly deep.” Economists, including economists in the administration, knew perfectly well that the tax credits would pull sales from the summer into the spring. Second, some are “now” urging a dose of shock therapy? Barry Ritholtz, for one at least, notes, “I have been arguing for the government to step away from propping up the housing market for several years now.” Finally, even if the White House is out of ready chips, housing is probably on the precipice of small, localized price declines. And if housing does go south nationally again, the Obama administration could undertake measures like principal write-downs.

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