December 2008, Dean Baker

This report states that bringing about the rapid adjustment of house prices to trend levels is the best means of returning stability to the housing market. The paper also calls for the restriction of GSE capital in bubble-inflated markets, with the intent of forcing house prices in these areas to return to trend level. The removal of capital from bubble markets and the consequent infusion of loans into non-bubble markets would stabilize prices in these areas, thus preventing a downward price spiral and overshooting of trend-level prices on the negative side. The report also advocates mortgage appraisal based on a price-to-rent ratio of 15 to 1. As well, the paper suggests giving families facing foreclosure the right to rent their homes both to keep them in their houses and offer banks real incentives to avoid foreclosure.

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