Economics & Research Blog
Make Up Your Mind Already
By Dr. Joe Webb
Published: August 26, 2007
This weekend's news broadcasts, radio and television, and newspaper headlines proclaimed the upcoming decline in the median price of homes with great horror.
Several things caught my attention. First, the report was based on a forecast of what the report would say! The real data are coming this week. Is the story so big that we can't wait for the real data?
Second, home prices have been rising for quite some time. Much of it was the result of low interest rates and a wide range of lending programs eager to encourage home buying, especially for first time buyers. When you create a large pool of money for that specific purpose, that will cause prices of that good to rise (the same has happened to college tuitions in the quest to make college "affordable"). Choosing one product over another on a regulatory basis exempts or creates an advantage for that product from having to compete in the marketplace with other goods.
High house prices were bad, the media told us, because they made homes unaffordable.
Now that the bubble is bursting, and that too many houses were built (because they were not subject to actual actions of supply and demand), the median price of homes MAY decline. The NYTimes/International Herald Tribune report indicated that "research firm Global Insight expects it to show a decline of about 1 percent between the first and second quarter." Yes, an entire 1%!
Finally, the entire subprime mortgage crisis, it is claimed, was caused by a lack of discipline among lendees and lenders. These are the same people who actually had to sit down at a table and sign documents that would say exactly what would happen at what times and to what degrees. Yet, when those conditions materialize, everyone is dumbfounded or shocked. Take your pick: Sgt. Schultz of Hogan's Heroes or Captain Renault from Casablanca. Someone's fibbing. We sign legal documents because of what they say. Both sides knew what they were getting into, and there are signed papers to prove it, and they all have copies.
Some areas, such as California, will be hit especially hard by the decline, it seems. Perhaps someone should tell the editors that California alone is so large that a serious problem there can cause the national average to decline. California's economy is still larger than China's, last I looked (yet we're not worried about imports from California and how they affect the New York economy). Perhaps the real story is how one state's real estate rush can backfire so badly is the real story? And what about the other side: responsible borrowers can now afford homes for which they did not think they had a chance just months ago. Bargains are not news, it seems. Why isn't the story about improved housing affordability? Rationality in the marketplace?
So are declining home prices good or bad? It depends on which way the wind is blowing that particular editorial meeting, it seems. Up or down, it's not a crisis, it's a marketplace. Why go for headlines with a forecast when the real data are just days away? This is press release journalism at its best, with a waiting news media anxious to puff up bad news: if it bleeds, it leads. Now, however, it might be "if it's forecast to bleed..."