Monday, February 23, 2009

Booms, Bubbles, and Busts

Those who argue that the current financial crisis demands that housing prices be stabilized understand the symptom, but not the real problem. The difficulty with stabilizing housing prices is that those prices had risen to unsustainable levels. Blame who you will -- lenders, buyers, financiers, or government regulators -- but people are upside down on their homes because those groups of people believed in a fairy tale that home values could rise beyond the ability of people to purchase them without consequence.

This chart showing home values over a period of over 100 years, adjusted for inflation, reveals the true nature of the problem.

Hat Tip: Doug Miller


Blogger Lanette said...

Interesting... so the market is trying to do what it does naturally, which is coming back to center. With such a huge adjustment, what do the economists that are not politicizing the current trend suggest is the best way to ride it out?

9:55 PM  
Blogger MCO said...

The problem was a long time in the making and does not lend itself to easy solutions. Letting prices drop back to sustainable levels results in people being upside down on their houses, increases foreclosures, and strains the financial system. However, efforts to prop up prices to artificial levels has the effect of prolonging the recession, as people will continue not to buy.

7:00 AM  

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