Lowering home prices won’t solve our problemsby Tim Manni
When asked whether Washington would consider instituting another homebuyer tax credit, HUD secretary Shaun Donovan responded saying, “I think it’s too early to say after one month of numbers whether the tax credit will be revived or not. All I can tell you is that we are watching very carefully.” Donovan’s comments have created a whirlwind of speculation that the government will once again step in and distort an already-unbalanced housing market.
Striking a balance
Just yesterday we discussed how the sheer unbalance in the housing and mortgage markets has made recovery even more difficult. So how do we restore the balance in the housing and mortgage markets and increase demand in order to sop up all the empty houses that are weighing the markets down?
Time to lower prices?
If you’re against another tax credit (which many are), or any other form of government intervention, how about the idea of lowering home prices? For weeks, if not months now, I’ve read articles and blog posts all across the web that say, if sellers really want to sell, they have to bite the bullet and merely lower their asking price. A recent article from Business Insider not only concurs, but says that lower prices are the key to a more stable market in general:
Lower prices will act as an automatic stabilizer by generating significant demand. At this point, more government intervention merely kicks the can down the road by pulling demand from the future. We can continue to deny the simple economics at work here, but at some point the market will prevail and prices will settle at a level that the market can absorb. In my opinion, the sooner this happens the sooner we can get on with the recovery process.
I don’t necessarily agree. I don’t think simply lowering home prices is going to create the amount of demand that will automatically stabilize the market. Home prices have already fallen some 30 percent from their peak, and still we haven’t seen any real boost to sales. Are further price declines really the answer?
More underwater borrowers
Sure, lowering home prices will allow more lower-income borrowers to qualify for mortgages, and yes, the market is made up of more lower-income consumers thanks to the recession. But what about the impact lower home prices will have on underwater borrowers? Those who are already underwater will fall deeper into a negative equity position, while those who have just a little equity remaining may find themselves upside down on their home loans. Furthermore, more underwater borrowers could lead to more walk aways, something nobody wants to see more of.
It’s all about consumer confidence
It all comes back around to consumer confidence. Consumer confidence remains weak, and until that changes, consumers won’t be interested in taking on any added financial risk at a time when the future outlook for the overall economy — especially the job market — remains bleak.
According to the Conference Board’s consumer-confidence index for August, more Americans feel that their salaries will fall six months from now compared to those who feel their salaries will increase six months from now:
But [Lynn Franco, director of the Conference Board’s consumer research center] noted that the percentage of people who expect their income to decline still exceeds the 10.6% who expect their income to be higher in six months. (Most respondents — 73.3% — expect their income to be the same.)
Lowering home prices isn’t the answer to stabilizing the housing market. In order to help housing, we need to think outside the box. But most of all, this country needs jobs. Washington has tried their hand at nearly every portion of the market except jobs. Until consumers are confident that their incomes are secure and that the economy has successfully rebounded, there’s no reason to expect home sales to be anything but shaky at best.