I came across this gem of a quote in an LA Times story on real estate this morning:
“Because the prices are going down so fast, we’ll be hitting the stabilization point sooner,” said Lawrence Yun, chief economist at the National Assn. of Realtors.
Now I’m not going to mock Yun for going to such absurd lengths to put a positive spin on the housing crash. He gets enough of that already. What’s interesting to me here is that he seems to be expressing a sentiment that I’ve previously heard from lots of bearish folks–that we shouldn’t try to slow the collapse in housing prices because that will just prolong the agony.
I get the reasoning: If house prices are falling because they were too high, then you want to get them down to a fair price quickly so people start buying and prices can start rising again. But it’s also now pretty much universally accepted that asset prices tend to overshoot both on the upside and on the downside. At a certain point both booms and crashes become self-fulfilling phenomena, driven not by real economic changes but by their own internal logic. The fact that prices are going down fast may spur a further price collapse rather than speed the arrival of some magical “stabilization point.”
With stocks it seems like the best course is just to let this crazy internal logic prevail. But given how leveraged many homeowners are, isn’t it worth making an effort to avoid a major overshoot on the downside? That is, wouldn’t it be better to have several years of stagnant home prices than a further sharp fall followed by a steep rise? I’m not confident that I know the right answer here. But I have an inkling that it might be yes.