The Housing Bubble Continues to Burst

The National Association of Realtors said today that home prices have now dropped to the point where they’ve wiped out all the gainsin housing prices since 2004. 2004, not incidentally, was when interest rates last hit bottom, and the Feds looked the other way while mortgage bankers began shoving money out the door to anyone who could stand up straight and many who could not. In other words, 2004 marked the start of the housing bubble.

Should we take comfort from this? A bit, except for the fact that housing still has a way to fall because boomers will be cashing in their homes over the next few years — buying smaller condos or, if necessary, rentals, for their retirement years. (Even though fewer and fewer boomers will be able to retire, they’ll need all the cash they can get). That means still more homes on the market, including all those bigger ones that were built when the boomers were having families. And more homes on the market means still lower prices.

In truth, home prices first began to rise more rapidly than rental prices in the 1980s, when boomers hit the housing market big time. So, demographically speaking, there may be even a longer way to go before the housing market hits bottom.

Meanwhile, younger people who might otherwise consider buying a home are waiting on the sidelines. Either they can’t get a mortgage loan (the banks continue to hoard) or they assume housing prices will continue to fall and are prepared to wait.

All this raises questions about how long and how much the federal government can mitigate the mortgage crisis. Obviously, it can do much more than it’s doing now — which is remarkably little, given the $350 billion that Hank Paulson has already burned through. But as housing prices continue to deteriorate, the number of home owners who are under water — owing more on their homes than their homes are worth — continues to rise. A portion of them will walk away from those homes, dragging down home prices around them.

It’s another mess Bush is leaving at Obama’s front door.

About Robert Reich 545 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

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