No Exit Plan for Housing Quagmire

Here's David Streitfeld in Los Tiempos de Nueva York, speculating that a new consensus on real estate non-intervention may "give the Obama administration permission to take the risk of doing nothing."

And here am me, three years ago, asking the previous administration's treasury secretary why the option of doing nothing was never considered.

Back when the market was still at the top of the slide, Streitfeld did excellent work demonstrating how downward stickiness in house prices was creating chaos. Here, for example, he shows how a Florida lender with a back office in India refused to let local agents lower asking prices on 753 foreclosed California homes.

The problem in 2007 and the problem today are the same problem: Nobody is willing to price a house low enough to sell. "I wouldn't quite phrase it as 'let the housing market crash'—instead I'd argue to stop trying to support house prices," says Calculated Risk's Bill McBride, who also notes that this is not a matter of neutral economic growth but a choice between two interest groups. By continuing to support home borrowers, even at depleted post-HAMP levels of service, you're punishing potential buyers—who don't need more tax breaks or fancier debt instruments but lower asking prices.

It's also not clear what "doing nothing" would actually mean. Winding down Fannie Mae and Freddie Mac, and selling their portfolios to an unenthusiastic private lending market? Eliminating the Federal Housing Authority with its disgraceful lending standards? Ending the mortgage interest deduction on your 1040? To end the hyperinflation of American real estate, you'd need to cut through a vast tangle of public policy and accept a price drop that could take us back to the middle of the Clinton Administration or earlier.

The market interventions of the last three years—including but not limited to TARP, HAMP, and the Fannie/Freddie bailout/conservatorship—may be uniquely unfair and ruinous. But a long pro-inflationary history led up to them—a grim tale in which Americans took on ever larger loads of debt for the privilege of buying ever smaller percentages of house. It will take more than doing nothing to dismantle all of that.