Falling Housing Market is Not Bad News

The drop in housing prices in October has almost uniformly been interpreted as a bad sign for the economy in 2011.  I’d like to offer an alternative viewpoint: I think the drop in housing prices may be a tough but necessary step in the healing process.

Consider this. The false boom of the 2000’s was built on rising home values. Americans borrowed against those high home values, which enabled them to maintain a higher standard of living than they could really afford.  The borrowing flowed into mortgage-backed securities, which were in turn bought by overseas investors, effectively lending America the money to finance the trade deficit.  On a country level, we maintained a higher living standard than we could afford.

We’re still doing it, though now housing, consumption and imports are being propped up by federal government borrowing.  We still haven’t made the big jump to investing in our future–knowledge capital and productive physical capital.

From this perspective, a rise in housing prices is a signal that the “bad money pump” has started again. It means we are falling back into the same bad habits of borrowing money from overseas to finance housing, which in turn is used as collateral for debt to buy imports. We don’t want that!

I’d welcome anyone who would explain to me why  housing prices  are a good signal of the underlying long-term strength of the U.S. economy.


  1. Eventually housing prices will reach bottom and start to grow from there. It will then be a good signal for the health of the US as it will mean we are earning enough to spend on them and raise their price. Those that were burned won’t be too ready to repeat their debt fueled drunkenness so don’t expect any return to old ways. This is, however, still some years in the future, the better part of a decade, so no one should look for it soon.

  2. By devoting substantial share of its economic resources into housing, US created only low value added, low productivity, non-tradable domestic service jobs during housing bubble years. It is time for US to devote a lion’s share of its economic resources into net fixed business capital investments, thereby creating advanced manufacturing industries and concurrently creating plethora of high value added, high productivity, tradable manufacturing and service jobs for American workers. To this end, US must find the will to abandon policies promoting consumption, speculation, and private wealth concentration. Instead, US must promote policies favoring build up of industrial commons for advanced manufacturing and accumulation of new capital stock.

  3. I would add a few things to this:

    1) The housing boom was built on abdication of lending standards, and that was the prime cause of both the credit bubble and excess home price appreciation;

    2) Prices need to revert back to traditional metrics based on GDP, median income and cost of renting;

    3) Home prices remain 8-15% elevated (See charts here:
    http://www.ritholtz.com/blog/2010/09/updated-housing-prices-vs-rent-median-income/ )

  4. Yes! Though it makes the paper wealth of many of families decline, falling house prices are where it is at! One thing you didn’t mention is the energy ball-and-chain that comes with expensive suburban homes. Thinking of housing as expense, not investment can’t come soon enough for some of us.


  1. […] Mandel argues that yesterday’s report on a drop in home prices isn’t such a bad thing, when you […]

  2. […] Mike Mandel goes contrarian and argues that a falling housing market isn’t bad news, but rather part of the necessary healing process for the economy. And Free Exchange finds it implausible that the house price fall will be as big as the most pessimistic estimates, because the time in which housing prices double-dipped coincided with a terrible time for the economy as a whole. […]

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