The latest I am hearing is talk in Washington about the federal government doing something to prevent housing prices from falling any further. This is sheer lunacy.
We had a bubble in housing prices in many parts of the country that ended just last year. Prices have dropped somewhat but they need to fall further so that middle income people can properly afford a house. For example, in Los Angeles, the median family income is approximately $60,000 per year. Here are the median prices of houses in that city:
Aug 07 $550,000Sept 07 $525,000
Oct 07 $500,000
Nov 07 $499,000
Dec 07 $470,000
Jan 08 $458,000
Feb 08 $460,000
The median price needs to fall to about $200,000 so that the median income family can afford it. Houses are not properly viewed as investments. True, they may increase in value if the population of the area increases, but in the recent bubble the prices were increasing even in areas like the northeast, where population has been declining.
Houses are consumption goods. Buy a house on a piece of land, and 20 years later you still have the same house on the same piece of land. The condition of the building may deteriorate but it will never improve unless you spend more money on it. Over the long run, housing prices do not exceed the inflation rate.
What is needed is for housing prices to come down to earth in many parts of the country so that middle income people can afford them. When I lived in south Florida, there were large increases in housing prices and middle income people were being driven out of the area because of it. The area became more and more like a banana republic with only the very rich and the very poor living there, not a politically stable situation.
The government needs to get out of the housing business altogether and allow market prices to seek their own level. People who have paid excessively high prices for their houses and financial institutions that have made mortgage loans secured by overpriced collateral should eat their own losses.
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