In a new column entitled “Time to Let Home Prices Fall?”, Tom Petruno of the LA Times writes:
Leave housing to market forces, let prices fall until buyers are motivated to come in, and hope that the economy can stand one final cathartic wave to clear the excesses of the bubble.
He also notes that
a new decline in home values also could force the banking system, and the government, to finally deal realistically with a root cause of the economy’s woes: the gigantic debt load consumers took on over the last two decades.
As measured by the Federal Reserve, the household sector is reducing its debt, but at a very slow rate. And because domestic hedge funds and nonprofits are folded into the stats for the household sector, we have no idea whether actual American households are reducing their debt at all.
The question is whether a sharp fall in housing prices would be bracing or destructive.