Less support for housing?

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.


  1. Ted Craig says:

    I can tell you that at least one sector is seeing consumers pay off debt and that’s auto finance.

  2. I saw a graph on this on another website (can’t remember which one) and the absolutely massive runup over the prior 10/20 years, this “reduction” in household debt is completely insignificant. Though, that same article tried to make a flawed case that in fact consumer debt had risen, by getting his sums wrong. But anyway, this once again points to the fact that the numbers we are seeing are badly flawed because they include some sectors that have no business being in ‘household sector’. Why do they have so much of an issue with bad classifications?

    As regards house prices, let’s face it, people just got suckered. People in many places with huges increases felt like they had to do something to get on the home ownership train, or else they’d be left behind forever, the way house prices got bid up, especially by speculators/”investors”. I refused to play that game, even though I could have afforded it, and boy am I glad I did. I still think house prices are 10-20% overstated in general. But, this does depend on where you want to have that house, many areas of the country had no runup and thus no crash either where there were no speculators. Facts are, the coasts still are attracting people and there is virtually nowhere left to expand to. So some of that is simply supply and demand. But it pains me to see some of the newer houses, crappy construction, yet people want $300k for a house that could only have cost $100k to build. And yes, the McMansion craze has a lot to answer for, because all the houses that were built were way too big and way too pricey for the ‘entry level’ homebuyers they should have been aimed at. I had a good friend, about 30, his 28 yr old wife who was ateacher and had lived at home, saw no problem with them paying $350k for thier first 4-bedroom house with professional interior design/decorating done. Ridiculous.

    A sharp fall in housing prices by itself would be an issue. What is really needed, is to allow people to move to cheaper houses, but to allow that mobility, we need jobs and supporting action by banks. The sad thing about the latest numbers is, the banks had finally begun to foreclose on all those people who’d been living rent free in their houses, but now they will see they can’t sell them, we’ll be back to doing nothing. Meanwhile, the number of ‘new’ delinquencies went entirely the wrong way, which means job losses are continuing to put more people into the ‘at risk’ group, meaning we’ll get a second wave of foreclosures in a years time. Banks reported $21b in “profit”, but I believe that all came from lowering their loss reserves. They are still sitting on massive, undeclared losses and that’s why the Fed’s hands are tied. Those banks need many more quarters of real money coming in to become solvent again.

    When even Toll Brothers are saying they don’t want to see another stimulus, you know its got to be right. So I predict we’ll have another round proposed and passed by Congress before Xmas.

  3. Another great analysts claiming we would be better off if the unemployment rate was 20% and the Dow Jones was at 5000.

  4. Right, cuz we all know that unemployment would be at 20% without the “stimulus,” which used the crisis to steal trillions from taxpayers and shit it away on pork projects. If anything it’d be at 6-8% if not for the “activist” govt saddling everyone with more medical and financial costs through job-killing “reform” legislation. Must be why the Democrats are about to show record losses in the November elections. 🙂

    • I’m critical of many of Obama’s reform efforts, but you’d have to be smoking something to think we’d have a few extra million jobs merely be their absence.

    • Not smoking anything (I don’t even drink 🙂 ), just not ignorant of the job-killing effects of high taxes and bad regulation, as you apparently are (click on the first link in the google search results to read the article for free). It’s tough to say the counter-factual of 7% unemployment would definitely happen if not for those inept reforms, as the economy is too complex to predict that well, but it’s certainly likely that there are a lot of businessmen, like that guy, who are holding back because of the regime uncertainty caused by the Democratic congress and Obama.

      • Karl O'Donoghue says:

        Ajay, this businessman is Ari Fleischer’s brother which is why the WSJ gave him the opportunity. As one of the 882 comments on the article you linked, put it succintly “Mr. Fleisher is disingenuous. The reason his company isn’t hiring is that their financial performance under his leadership has been terrible. Since 2000, revenue has shrunk from $66M to $44M in 2009 (how come the gigantic tax cuts didn’t help?) The number of employees shrunk accordingly, 285 to 160. Meanwhile competitor Polycom grew revenue by 300 percent over the same period and increased their employee count by almost the same amount. According to their website, they are hiring.”

      • Karl, perhaps he’s a mediocre businessman, I wouldn’t know. I note however that you cannot address any of his points but go for an ad hominem attack on his personal ability, always a sign that you’d like to avoid debating the actual issues. 😉

    • btw, your stimulus dollars at work, enjoy. 🙂

  5. Mike Reardon says:

    Housing at it height about 2007 was 6% of GDP, the other day someone said, it now only accounted for 3% of GDP. The forward returns to private investors and state revenue are going to reflect that reduction. The market all fo 97% is now supported by some GOV program. Only like 3% of loans for housing over the last year were totally private. Remove that GOV support and leave it to bank standards, and private market may only support 54% ownership for the next decades. If it now shakes out below 2% of GDP going forward, the returns and state revenue will truly have much less significant as a base in the economy. Housing like domestic manufacturing may have passed as a sustainable concern to the economy.

    • Mike Mandel says:

      You are giving the numbers for residential construction, not for existing homes. In fact if home ownership drops, the housing will still be there, but it will be rental. And even as a rental it will still be paying property taxes.

  6. Karl O'Donoghue says:

    Ajay, there is no need to distract from the issues by linking to flawed articles. The issue will stand on its own. His opinion is that he does not believe in income taxes. You are in agreement with him? This being his opinion, it warrants scrutiny. Ad rem.

  7. Karl, haha, I note that you cannot state a single reason why the article “distracts” or is “flawed,” just more warrantless claims on your part. Have you even read the article? I don’t see him calling for no income taxes anywhere in it. However, if he had, I would agree with him, as I am definitely against all income taxes. 🙂

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