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Blog

    Common Sense on the Housing Crisis

    03/06/2008

    WaPo columnist Robert Samuelson has an oped on the housing crisis that is a breath of fresh air among all the negative headlines.  "It's elementary economics," he says:

    Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.

    Even many economists — who should know better — describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four a few years ago. But the real problem is insufficient demand. There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices.

    By definition, the "housing bubble" meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.

    Look at some numbers from the National Association of Realtors. From 2000 to 2006, median family income rose almost 14 percent to $57,612. Over the same period, the median-priced existing home increased about 50 percent to $221,900. By other indicators, the increase was even greater.

    But home prices could not rise faster than incomes forever. Inevitably, the bust arrived.

    [...]

    Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand is affordable prices.