Housing Market Revisited

The lead article in today’s New York Times, “Federal Retreat on Bigger Loans Rattles Housing,” shows how the government has artificially propped up the housing market, first with an $8,000 tax credit for new homebuyers and more recently with Fannie Mae guaranteeing loans. These guarantees are now being withdrawn for more expensive dwellings — there is no right to live in a $750,000 home — and the housing market is about to swoon into another depression as a result.

Housing prices have gone down 7.5 percent, and most sales these days are from foreclosures. New home construction has almost ground to a halt, and one wonders whether the housing market will drag the whole economy back into a recession like it did the last time.

In any case, new home loans are going to become more stringent in terms of their availability, conditions and rates. One can only hope that the rest of the economy has become resilient enough to survive this new downdraft in housing conditions. The Mortgage Bankers Association, of course, opposes this withdrawal of government guarantees, and, if things get really bad, perhaps the government will change its mind.

In effect, this new policy represents a test case of the housing market, without its more recent supports, to see whether or not it truly is strong enough to stand on its own.