A few months ago, I wrote this:
Now comes a story from the AP saying that people's expectation of PI is negative 1/4 of the time. This all by itself will substantially decrease house prices, and may cause them to overshoot below their fundamental values. Ed Leamer has a proposal to use the tax code to prop up values, but because it is temporary, I am not sure it would be sufficient. More important is the rapid expansion of the FHA program, which explicitly places the US Treasury behind housing markets. We'll see whether it is sufficient...
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3 comments:
Do we want to prop up house prices? I thought realigning house prices to rents was important for making housing affordable again?
Many loans won't be paid back if prices fall. New loans may not be issued if old loans are not paid back. Some people want to force new buyers to pay ever more so old loans will be paid back, or refinanced.
Ever greater burden on new buyers under this system. New buyers will suffer an ever lower standard of living, having less to spend on other items. Alternatively, new buyers will work lots of overtime to afford ever higher prices.
Ponzi scheme. Eventually, new buyers rebel. Refuse to work any more overtime, or eat cat food to pay absurd home prices. System collapse.
Better for new buyers to just let cheap homes be built. Place to live, no overtime, and money left over to buy real food.
Though the post is small but quite informative. As I was looking for PI, now I have a fair bit of Idea from this post and references you provided.
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