Incomplete Logic Strikes Again!

Pat Garofalo of Think Progress bemoans the worsening housing crisis as housing prices fall ever lower despite marginal gains in employment. To be clear, Pat is just expanding on a recent Wall Street Journal piece. What both articles highlight is the fact housing prices have failed to rebound.

Low home values have made it much harder for Americans to move because selling a home is so difficult. That is especially true for the 10.7 million Americans—or 22% of homeowners with a mortgage—who owed more than their homes were worth as of the end of September

As the article explains, homeowners are unwilling to sell their homes at such a loss. Job seekers will not move to gain employment, but seek to first sell their house, slowing future employment gains. As foreclosures increase again, housing prices will likely fall further as banks sell the houses to turn a profit.

I’d like to highlight two things: First, the article fails to take into account the other side of the equation. True, homeowners might be loathe to take a loss on their home’s value, but if housing prices are lower, then doesn’t that facilitate the ability to move? Think about it, it’s easier to move somewhere and take a job if the houses there are cheaper. So even if house prices jumped across the board and homeowners would be willing to sell again, the cost of moving has just gone up. It’s not obvious that housing prices have a one-sided affect on the costs of moving.

Second, why are homeowners unwilling to realize losses on their home values? The answer lies in a potential, if unspoken, solution: artificially boost housing prices through government spending. Perhaps some homeowners are awaiting a government bailout, or return to previous values before selling. If the first, the government has artificially slowed natural market processes down by conditioning various groups to expect bailouts. If the second, actors will realize values may never go back up, and continue on their normal, value-maximizing way.

What is the market solution here? The very process Garofalo thinks is a negative factor: bank foreclosure. When banks do this and sell the houses they lower housing prices from their debt-laden heights. This allows people once again move freely and use the real value of their homes in decisions.

Unfortunately, this forces the losses of the housing bubble onto homeowners. But remember who (or what process) is to blame, artificially stimulating demand for houses beyond what it was. This resulted in higher home prices, and losses in other sectors that will never be known. The artificial demand could not, and did not, last as unsuspecting homeowners experienced the consequences of government intervention in the economy. I’m willing to hear ideas on how someone else could bear the burden of this loss. The only caveat I add is that it does not further distort the natural market process.

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3 Responses to Incomplete Logic Strikes Again!

  1. libertas December 30, 2011 at 1:41 am #

    Great insights. Until commentators/economists fully reckon with the importance of the price system, we will continue to have analysis like you linked to in your article. Falling prices might be detrimental to some individuals, but that doesn’t mean that they signal which they are sending should be ignored….

  2. Sam Stearns December 30, 2011 at 2:26 pm #

    Does the market solution to artificially high housing prices not also force the losses of the housing bubble onto banks as well as homeowners? I’m not an insightful economist, by any means, but it seems to me that a bank makes far less money by selling a foreclosed house than it would if the homeowner was able to continue paying off the mortgage. I suppose that once the bank forecloses the house, it becomes the homeowner instead of the original occupants of the house. But at any rate, the two parties directly involved in the creation of a mortgage around artificially high housing prices (i.e., the mortgage holder and the home buyer) are the ones who will have to pay the price when the bubble bursts. While this is undesirable, I see no other more desirable alternative. The market is in the middle of dictating a correction in the housing sector; the more we fiddle with this process, the more prolonged and painful the correction will be to all of us.

    I’m excited about this new blog. It looks like a place where I could learn a lot. Thanks.

    • krlatham December 30, 2011 at 4:06 pm #

      Good point. When the bank forecloses, it means the homeowner can no longer pay the mortgage,making the best alternative for the bank the quick sell. So while both loose the price of the initial mortgage, the bank at least has the sale of the house to help cushion the blow.

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