Stop Distorting the Housing Market

By removing subsidies and other market distortions, not only will a given market sector move more in line with its economic value, but justice will prevail. Indeed one of the reasons the virtue of justice is so important is that it allows good men to live together harmoniously.

This is particularly true with respect to the housing market, where government programs like artificially low interest rates, tax subsidies and now forgiveness and below-market refinancings have rewarded the reckless and the irresponsible at the expense of the prudent and responsible. Though the NY Times probably will never make the moral point, it's encouraging to see it finally publish stories making the economic point.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

See also these ARI pieces 1, 2.