Debt Overhang Makes Housing Prices Key To Recovery

Robert Bridges has an op-ed in the Wall Street Journal dedicated to showing that homeownership is not a particularly savvy investment, illustrating the point with a look at California:

That seems about right. A “house” is typically a bundle of a depreciating consumer durable good (the actual house) and a speculative commodity (land). It’s possible, clearly, to make money with speculative investments in commodities. People make money speculating in gold, people make money speculating in oil, and people can make money speculating in land. But there’s no reason to think that amateur investors will do systematically better as land speculators than as speculators in anything else. The general advice that if you’re not an expert, you’ll do best to hold a diversified portfolio seems sound. Talk about “houses” tends to obscure what’s actually happening here.

But Bridges goes from that sound point to criticizing the idea that bolstering house prices can be useful in promoting economic recovery. In his telling, political interest in doing so is all interest group politics. But there’s a very real issue here, namely debt:

As houses got more expensive, people took out larger loans to buy them. Then the prices started to fall. But a person who owes $200,000 to the bank and owns a house worth $200,000 is in a very different position from a person who owes $200,000 to the bank and owns a house worth $150,000. Efforts to juice home prices are, in part, about efforts to eliminate this debt overhang problem. As it happens, I think it’s not a very sound approach. The better ideas would be either principal reduction or, even better, 4 percent inflation. A return to Reagan-era levels of inflation would speed the deleveraging process without increasing the cost of housing to the non-indebted. The real issue here is that the “reinflate the bubble” strategy is the most bank-friendly approach.