House Prices Must Return to Trend Levels to Stabilize Market
by Tom on December 10, 2008
in house prices
We’ve been hearing more and more that the government needs to do “something” to stabilize house prices. Read the excerpts below and then I’ll make a few more comments at the end….
With new data coming out each week lamenting plummeting house prices and some policy makers advocating price supports in the housing market, a new report from the Center for Economic and Policy Research (CEPR) offers a straightforward solution to the turmoil in the housing market: let the prices fall.
The report, “The Key to Stabilizing House Prices: Bring Them Down,” notes that prices are still hugely out of line with trend levels in bubble markets and calls for Fannie Mae and Freddie Mac to restrict the buying of mortgages in these areas. This would lead to fewer loans being issued in these markets and prices would quickly adjust to normal levels.
The report, which draws on data from the Case- Shiller Index, emphasizes that house prices used in mortgage appraisals should be based on rental values to avoid over-valuation. The fact that real house prices exploded by 80% from 1996 to 2006 while rents increased by only 4% over the same time period points to a degree of speculation and the fact that prices still have further to fall before the bubble deflates.
House Prices Must Return to Trend Levels to Stabilize Market | RISMedia.
A few thoughts about this:
- I’ve been saying, for a while, that any effort by the government to artificially stabilize home prices wasn’t going to work and was just going to stretch things out further and make recovery take longer.
- Interest statistics that real house prices went up by 80% but rents only went up by 4%. That statistic (if indeed it’s true on a national level) illustrates the bubble that is popping.
- If you read further in the article, it talks about a proposal where foreclosed homeowners would stay in their houses as renters. I think I’ll have to write more on that idea and the implications of it going forward. But that’s a topic for another day.
- This report also says that home prices need to follow rents (or be in line with them.) They need to be closer in line, but I do believe that for most people there is an “ownership” premium where people are willing to pay more to own than to rent, but not as much as they had in the past.
We haven’t heard the last of the discussions about housing prices. Stay tuned.
