Tags: housing | market

Fed Official: Let Housing Markets Fall

By    |   Thursday, 06 Aug 2009 10:20 AM

Letting housing markets fall will allow the economy to recover, says Gerald O’Driscoll Jr., former VP at the Dallas Fed, in an editorial in The Wall Street Journal.

Government efforts to prop up prices will only screw things up. “Nothing could be more counterproductive,” he writes.

The housing collapse was the popping of a classic asset bubble. As prices rose beyond the reach of median incomes, lenders promoted creative financing that increased demand and speculators jumped into the market, further fueling the bubble.

Those speculators can now stop the downward spiral in home prices, O’Driscoll says, noting that speculators are now scooping up homes at discounted prices, sometimes renting properties to former owners.

The situation is much like the Savings & Loan crisis in the 1980s. The Resolution Trust Corp. at first held onto former S&L assets to prop up prices. But only dumping the assets allowed commercial real estate to recover.

Fortunately, government programs aimed at supporting prices have failed. A successful effort would have created an overhang of unsold, over-priced homes, he says. Speculators would have remained on the sidelines and first-time buyers would have remained priced out of the market.

Taking a different viewpoint, Congress just voted to allow FHA to insure an extra $85 billion in mortgages this fiscal year.

“With the housing market just showing some signs of growth, cutting out affordable mortgages would be a disaster,” Rep. John Olver (D.- Mass.) told the Associated Press.

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Letting housing markets fall will allow the economy to recover, says Gerald O’Driscoll Jr., former VP at the Dallas Fed, in an editorial in The Wall Street Journal. Government efforts to prop up prices will only screw things up. “Nothing could be more counterproductive,” he...
housing,market
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2009-20-06
Thursday, 06 Aug 2009 10:20 AM
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