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Sunday, September 18, 2005

All Around the Carpenter’s Bench, Pop! Goes the Bubble…

Daniel Akst makes some reasonable points about the housing boom.  But I wouldn't break out the Champagne over the short-run transitional costs people must endure as the economy is rebalanced like he would even if there are long-run gains. I also wouldn't say, as he does, that the housing boom was necessarily a bad thing - if low interest rates propped up consumption and investment and avoided a recession then there is an argument that policy reduced the variation in output.  So maybe the bubble loved us after all:

Pop Goes the Bubble? Maybe It's Time to Cheer, by Daniel Akst, NY Times Commentary: ...Now that home prices in some markets are showing signs of moderating, lamentations are rising from all sides about the many bad things that may happen... Unfortunately, all of this hand-wringing tends to distract from the essential truth about soaring home prices, which is that they are a bad thing... the housing bubble never loved you. The bubble is not even your friend. In fact, the very best thing you can say about the passing of this particular bubble is "good riddance."

What's so bad about skyrocketing home prices? ... First, they make life awfully difficult for people who aren't already homeowners and do little for people who are, because selling one inflated house only to buy another affords little profit. ... it probably also suppresses other kinds of saving and encourages excessive debt. And it has helped addict global producers to American consumerism, because it gives Americans the confidence - and in many cases the wherewithal - to spend some of the inflated value of their homes. ... Sky-high home prices also divert too much capital into home building from potentially more productive uses. And these prices fuel risky, not especially useful speculation in residential real estate. ... Excessive home prices divert human capital as well. The National Association of Realtors had 1.1 million members at the end of 2004, up from 766,560 in 2000. It's hard to believe that such an increase would have occurred if there had been no housing bubble. Finally, wouldn't it be better for society ... if people could buy a home without resorting to ... loans ... that are risky for borrowers and lenders alike? ... High home prices may contribute to social and economic inequality by making ... it nearly impossible for people without enormous incomes to afford homes in places with the kind of desirable school systems that can help put children onto a higher earnings trajectory.

But if inflated home prices are bad, isn't the end of a housing bubble worse? Not necessarily. There is always pain associated with market adjustments... The Federal Reserve, through its monetary policy of low interest rates, has propped up real estate prices for years. Other government policies, from zoning to building codes, are doing likewise... If prices moderate, maybe we won't gobble up open space as quickly. Lower prices will clearly deter some speculators, who will put their money to work elsewhere. And some of those real estate brokers will find something else useful to do. Best of all, people at dinner parties and soccer games will have to find something more interesting to talk about. That alone makes the end of the housing bubble a good excuse to break out the Champagne.

Even though he wants to break out the Champagne, somehow I don't picture Daniel Akst as a throw caution to the wind and let's party kind of guy.

    Posted by on Sunday, September 18, 2005 at 12:54 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (11)

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