A House of Horrors

Recently, I read a list of the most stressful cities in America and a big part of determining the rankings was how much property values have declined in the last 12 months. This fact, the fact that a decrease in home prices cases widespread stress proved to be the final straw, the final nudge towards an epiphany.

A combination of financial practices and government subsides and other incentives have created a situation where any decline in home prices causes stress and misery on a large scale. This is why, I fear that this current downturn will not be unique and will recur several times until government and private actors move away from the mindset that homes are like commodities in which individuals should speculate in the short run. Rising assets prices are generally a good thing, in the case of real estate, it means that a community is growing and becoming more vibrant and for that reason that home buying was, in previous generations, seen as a very safe and passive long term investment. Home prices would rise and fall year fater year and a decline in prices for few years was not a serious matter unless you absolutely had to sell during those years.

Unfortunately government subsidies, Freedie and Fannie and willing financial firms, loan officers and home owners and perspective home owners allowed much of the economy to be partially if not completely dependent on not only yearly increases in home prices but double digit appreciation and without it, well without it, we have seen the devastation it has caused.

Policy makers need to change the incentives to make the US economy less vulnerable and subject to deep recessions whenever real estate prices fall. Prices need to fall to clear the market and from a social stand point, to make it possible for a new generation of married couples and young families to get homes and to do so with mortgages that do not depend on refinancing every few years.

Homeowners have a large amount of political power and want a restoration of the status quo but for the sake of the economy, the sake of the future and the for the sake of stability we need to change the incentives that caused the distortions that caused the malinvestment, which created all of the jobs and fortunes which simply cannot withstand the inevitable declines in real estate prices. Not having your job, the life of your community the viability of your mortgage bein gat the whim of yearly fluctutions in home prices would make communities across America much less stressed.