If you flip back and forth between writing about the national economy and writing about urban issues, you quickly get a kind of whiplash about home prices. In one context, people want them to go up. In another context, everyone agrees that “affordable housing” is a vital need. And yet affordable housing is housing whose price is, by definition, low.
In other words, what Mark Kleiman said:
I’m also obviously unclear on the concept about housing prices overall. Again, I understand why banks and under-water homeowners want prices to go back up. But from a social perspective isn’t it obviously better for housing to be cheaper?
Similarly, I understand why a revival of home construction seems like a good idea to the construction industry, and why people worrying about having adequate demand to return to full employment are hoping for help from that sector. But I can’t see any good reason to want housing to take a larger, rather than a smaller, share of consumption and investment.
Like with commodity prices, I guess the bottom line is that you can’t draw conclusions purely from the change in price. If the economy revives and incomes go up, the price of housing will increase. But if a series of horrifying tornados destroys all the built structures in the state of Texas, that will also cause the price of housing to increase. Conversely if a neutron bomb hits Manhattan, it’ll open up a lot of affordable housing. The issue in all cases is “what’s actually happening here” rather than “are houses cheaper.”
But the core point, I think, is that it’s a kind of folly to think that the best way to deal with distressed mortgages is through efforts to prop up prices and somehow keep housing expensive. What’s needed is a process—cramdowns or the like—whereby we can readjust loan burdens downward to something more in line with reality. And more broadly what’s needed is fiscal and monetary expansion—up to and including helicopter drops—to bolster incomes across the board. The overly indebted will need to use bolstered income to pay what they owe, and those who are more fortunate will just buy more stuff. Presumably that will lead to an increase in nominal home prices, but that would be a consequence of growth rather than a cause of it.