Sunday, September 18, 2005

Why a Busting RE Bubble is a Good Thing

Finally, some common sense at last. This New York Times article clearly details some of the reasons why the busting of this real estate bubble is a good thing. Which really is a good thing as this RE bubble is going to bust sooner rather than later (also this at Forbes.com is worth taking a look at).

Some choice quotes:
"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 as a result. These include bankruptcies, foreclosures, bank failures, unemployment and recession."

"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. So before you become carried away with mourning, let me break the news: 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? Almost everything. 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's true that mounting home equity makes for a nice piggy bank, but it probably also suppresses other kinds of saving and encourages excessive debt. And it has helped addict global producers to American consumerism..."

"Sky-high home prices also divert too much capital into home building from potentially more productive uses... Then there is the matter of sprawl: all those new homes will mean more driving, more fossil-fuel consumption and more pollution."

"Finally, wouldn't it be better for society, and safer for our financial system, if people could buy a home without resorting to the kinds of loans - with deferred amortization, for example, or scant down payments - that are risky for borrowers and lenders alike?"

"High home prices may contribute to social and economic inequality by making far too many places out of reach for anyone but the rich, and 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. But as the economist Herbert Stein once dryly observed, if something cannot go on, it will stop. 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."

"My sense, though, is that home prices appear determined to fall, at least where they are most inflated. And having them fall sooner imposes lower costs than having them fall later, while delivering immediate benefits."

"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."

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