CNN titled this piece, “No pain, no gain in housing market,” in order to make the point that the faster home values fall, the closer we will get to an honest recovery. They frame the statement with the ubiquitous “Some economists argue” the point, but there are few things more certain in economics that assets overvalued in bubbles have to return to rational valuation in order to stabilize their markets. After three years of sinking home values continuing even after short-term interventions by government, is this really still a controversial point?
Kudos to CNN for at last providing some common-sense analysis, although their report ignores the reason we’re not seeing more qualified buyers: unemployment. The buyer’s market exists in part because of still-too-high home prices and a lack of qualified buyers. Even when home values reach a rational level consistent with inflation — a point still some distance off — the lack of qualified buyers might further depress sale prices. We need economic policies that create job growth and keep people from being forced into foreclosure. When prices reach a rational value and we get more qualified buyers into the market, then housing markets will recover and construction will follow shortly after.
This analysis should prompt a serious review of the attempted interventions into the market over the past three years, however. Taxpayer money went to waste, encouraged people to lose money on homes by accelerating their purchases at artificially-inflated prices, and failed to prevent the utterly rational and natural evaporation of the bubble valuation. That should remind everyone to get government out of the business of short-term interventions, and not just in housing markets, either.