November 27, 2013
At its peak in 2006 the housing bubble in the United States created more than $8 trillion of bubble generated equity, making it the largest asset bubble in the history of the world. This one was easy to see to anyone who paid attention to fundamentals in the markets like long-term price trends, rents, and vacancy rates. The failure to see the bubble should raise questions about someone’s competence as an expert on the housing market.
For this reason it is distressing to see the Washington Post rely exclusively on people who missed the bubble in an article on the current state of the housing market. The piece implies that it is mixed news that house prices are not rising more rapidly, wrongly telling readers that:
“Rising values are essential for the approximately 7 million Americans whose mortgages are larger than their homes are worth.”
This is of course not true. Rising prices are desirable for any homeowner, but they certainly are not “essential” to underwater homeowners or anyone else. If an underwater homeowner can pay their mortgage and intends to stay in their home, then a period of being underwater does not carry great consequences. If they want to sell their home then it is certainly desirable that they have equity and aren’t in a situation where in principle they owe the bank money at the closing. But banks often will accept a short sale, which means that they treat the sale price as paying off the mortgage.
It would have been useful to point out to readers that house prices are already well above their long-term trend, suggesting that the market is at risk of being inflated by another bubble. This would mean that many new home buyers will pay bubble-inflated prices for their homes and face large losses in equity when prices return to trend levels. The return of a housing bubble can hardly be seen as a positive development.
The Post totally failed to note the existence of the last bubble, in part because it relied on David Lereah, the chief economist of the National Association of Realtors and the author of Why the Housing Boom Will Not Bust and How You can Profit from It, as its major source on the state of the housing market. It does not appear as though its reporting has improved in this area.
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