More commentary on home prices
Proposals by politicians and economists to try to prevent further price declines will inevitably prove counterproductive. They are likely to encourage more oversupply through more building (unless we also restrict building, in the same way that farm price support programs often restrict agricultural production) and will simply lead more people to buy homes at bubble-inflated prices.
The best course for the economy and the housing market would be if house prices fell back to their trend levels as quickly as possible. At the recent pace of price decline, house prices should reach their trend levels by the middle of next year. Of course, tight credit and the further weakening of the economy could bring this date forward. It would be reasonable to try to prevent prices from overshooting on the downside, but this would mean focusing on the markets where this could occur (e.g. Detroit and Cleveland), not a blanket effort to prevent price declines nationwide.
Baker is co-director of the Center for Economic and Policy Research.