House Sales Down

New home sales way down in August instead of modestly down as had been predicted. As the housing downturn is, on some level, at the root of our current financial problems it’s worth emphasizing the urgent need for any measures aimed at resolving the crisis to target the housing situation. Now insofar as houses came to be badly overvalued in 2005-2007 there’s no way to prevent a decline nor, ultimately, any reason to regret the inevitable fall back down to earth.

But it would be very nice to make the decline relatively gentle rather than harsh. In particular, when an asset bubble bursts the tendency is for prices to wind up overshooting in the downside direction and then prompting a prolonged slump. There’s a sort of poetic justice to that sort of thing, but there’s no economic reason that it needs to happen. More generally, since people don’t need to buy and sell houses all that often, there’s the potential for a relatively soft landing. If nominal prices decline a little over a few years, during which time there’s inflation, population growth, and real income growth then demand can “catch up” without prices going through the floor. There’ll continue to be a construction bust during that period, which is why we need some kind of stimulus that targets that sector, but there’s no way to avoid that. In principle, we could juice building trades employment to some extent by coming up with a public sector program that pays for the targeted demolition of vacant homes to both employ demolishers and also speed the elimination of the supply overhang.