The Housing Market

| Thu Jan. 8, 2009 12:55 AM EST

THE HOUSING MARKET.....Barack Obama talks to the New York Times:

He said that he intended to propose a broad overhaul of financial regulation by April, and that he was working with Congressional leaders on his promised plan to limit foreclosures in the wake of the mortgage crisis.

"We've got to prevent the continuing deterioration of the housing market," he said.

But that's not true. Housing prices are still well above where they ought to be. Unfortunately, they need to deteriorate some more.

This is the big problem with efforts to rescue homeowners rather than banks. It makes sense that if banks have lots of assets that are toxic because they're based on uncertain house values, then rather than bailing out the banks directly we should just do something to make house prices more certain. Mortgage-backed assets would become easier to value, bank balance sheets would firm up, credit markets would start to ease, and distressed homeowners would get relief in the process. It's a win-win.

Except for one thing: we don't want to prop up housing prices at their current unsustainable levels, and we probably couldn't do it even if we wanted to. Rather, we need to find ways to help out homeowners even though prices are going to continue to deteriorate for a while. That's pretty tricky, though, since anything you do to rescue homeowners also has a tendency to keep house prices propped up.

Still, some things are better than others. Programs that motivate lenders to reach workout agreements with owners who are underwater probably have the biggest bang for the buck, and hopefully that's the kind of thing Obama has in mind. But whatever it is, it better not be something that tries to hold back the tide of falling house prices. It didn't work for King Canute and it won't work for President Obama either.

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