Housing prices can't drop too much. The good far outweighs the bad.

In response to Mark Thoma's post today, Wishful Thinking:

"Are we near the bottom? Is the end near? I wish I could answer yes"

Mark, please think very carefully about this. Do you really wish housing prices would stop falling? Do you really think it would be better to have housing be more expensive? Do you really think the costs of lower housing prices outweigh the benefits? Do you really think it's better to preserve the wealth of a minority of wealthier homeowners and investors, at the expense of the middle class and poor, who are really hurt by high home prices? I know most of the middle class own homes, but they can't benefit from higher home prices unless they move to a smaller or otherwise less desirable home. Their children, on the other hand, can be devastated by high home prices.

Harvard bankruptcy and personal finance expert Elizabeth Warren points to high home prices as the primary (later stage) reason for our epidemic of financial distress, and the primary reason why over the last generation family fixed expenses have gone from 54% of gross income with just one spouse working to 75% for two (from Warren's book, The Two Income Trap, pages 50-53), with the inflexibility of this leading to debt spirals and today's epidemic of financial distress.

As Warren notes in her 2007 testimony before the Senate Finance Committee, "In 2004 the median homeowner was forking over a mortgage payment that was 76% larger [in real inflation adjusted dollars] than a generation earlier." (page 6). So now with home prices dropping, maybe it's down to 50% higher, so we should stop making something as fundamental as housing more affordable? That would be a good thing?

Lowering of housing prices, over the long run, does immensely more good than bad. It's a great thing. They can't go too low. What if they went to 1 cent for the average home? That would be bad? Over the long run that would make almost all families and individuals immensely more financially secure, to have just a trivial mortgage or rent payment. The lower the better for housing prices. The good this does far far outweighs the bad (although I certainly agree with well constructed aid for deserving homeowners at risk of, or in, foreclosure, and for other deserving people in financial distress). For more details, I have a brief paper regarding this.