Monday, March 29, 2010

Astonishing idea: let home prices fall

Even when everyone around seems to have totally lost the plot, you can count on Caroline Baum to step in with some sorely-needed logic and truth. This week's edition: home prices and foreclosures.

Caroline reminds us, "Lower home prices can fix what government can't":

New home sales, which lead the complex of housing indicators, fell to an all-time low of 308,000 in February, the fourth consecutive monthly decline. For existing home sales, it was the third consecutive drop after last year’s tax-credit- driven bounce.

Homebuilder sentiment has rolled over. Housing starts are bumping along the bottom, with new construction too low to accommodate normal growth in households, according to Michael Carliner, a Potomac, Maryland, economic consultant specializing in housing.

Alas, all the Fed’s purchases and all the government’s men can’t put the residential real estate market together again.

Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit.

What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)"

Go read the whole thing, and check out Barry Ritholtz's post, "More Foreclosures Please" as well.

Time-saver for those forwarding this post on to government officials: you can't alter the basic rules of supply and demand. Or as the Stones sang, "You can't always get what you want".