10/31/2011

Home Prices Heading for a Triple-dip

It's no secret that the housing market is struggling and will continue to struggle for many reasons. Article
  1. Foreclosures are still flooding the market.
  2. High unemployment remains a problem.
  3. Potential buyers struggling with bad credit.
Even though potential home-buyers have much to be glad about they are still fearful of the continuing lag in home ownership.  Rates are still sitting at historic lows and home prices are obviously extremely affordable.  Although the government makes efforts to stall future foreclosures by changing past programs to accommodate more people, many are still skeptical that those people underwater will still let their house go into foreclosure.  The demand for housing has not been able to find sustainable growth due to this weak confidence that the country has its problems under control. 

With this being the third dip in housing since the beginning of the economic woes there have been many efforts to spur growth or simply halt the fall of housing.  The government has given tax credits to first-time home buyers as an incentive to purchase. They have artificially made efforts to push home loan rates lower, and now make further efforts to offer refinancing for those upside-down in their home value.  With all of these things slowing the fall but not eliminating it, I am led to believe that maybe the invisible hand theory would have been best.  Maybe we would have seen one sharp drop and already begun the recovery in our economy.  While I always have believed that the economy could correct itself I was also fearful that without some assistance we wouldn't have been able to weather this storm.

3 comments:

Cameron said...

I agree that in most instances an economy regulated with a laissez-faire or invisible hand philosophy will eventually self-regulate. The question is how long will recovery take and what are the odds of collapse?
That having been said, history tends to repeat itself. If we take the example of the Dutch tulip bubble of 1673, the results are interesting. Due to speculation, tulip bulb prices were built up to the point where they were over one hundred times their original value. When the bubble burst, there was little to no government intervention. The result was that money became worthless, banks failed, unemployment ensued and the Dutch economy was decimated for decades.
We have seen several bubbles in the last fifty years such as stock market bubbles, and the dot com bubble. The question remaining is; do we let the economy fall hard and hope it does not collapse or do we intervene and slow the descent hoping for less destruction.
If intervention is the chosen answer, the next question is how much should be done and how much intervention is appropriate.

Cameron said...
This comment has been removed by the author.
Dr. Tufte said...

-1 on Gubler Family for a poorly formatted link.

You are guys are engaging in a counterfactual argument. It would be nice to test this, but there isn't a way to undo what's happened. So it's a form of wishful thinking. It's wishful thinking that I happen to agree with, but I can't be sure about it.

One thing to keep in mind is that you are asking for a laissez-faire response to the bursting of the bubble without saying anything about the fact that this market was far from laissez-faire before the crisis. If, say, government induced the bubble artificially, it isn't clear that the appropriate response is to do nothing.