Do we want house prices to fall faster or slower?

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.

Apple CEO Cook Gives Up $75M in Stock Dividends

NEW YORK — Apple CEO Tim Cook is giving up $75 million in dividends on restricted stock that the company is awarding to all of its employees.

In a filing with the Securities and Exchange Commission on Thursday, Apple Inc. said that Cook requested that his restricted stock units not receive dividends. The dividends that Apple workers are getting amount to $2.65 per quarter for each restricted stock unit held. The shares are not normally eligible to receive dividends, so Apple’s decision is a perk for its employees.

That Anonymous Dude

faster with overshoot. i want new episodes of real estate shows on hgtv where people claim to be flip masters by buying a house for $5, putting $50 into it and selling it for $100 6 months later, without factoring in that if they had simply held onto it w/o doing anything they could have sold it for $90 anyway.
http://www.bergenjerseyforeclosures.com/ bergenforeclosures

Justin,

The correction needs to come as fast as possible. It is going to cause a lot of problems when housing prices crash but inflated house prices has been the norm for too long. As early as 2001, the us government had concerns about practices that were implemented, in some case by lenders, that were artificially inflating home prices. By 2003 HUD finalized the rules for FHA insured loans. I only found this out because apparently these rules were suspended today so that these same lenders can have an easier time unloading their foreclosures.

I also have a posting entitled “Where should house prices really be and how did they get so high?” that shows how fast house prices were increasing in relation to incomes. The increases make no sense. In a 2005 HUD affordability study they show that the rate of increase of the ratio of house price to income for low and mid level income groups rose quite steeply. For the high level income group it actually fell for a period and then returned to normal. As if while the high income group were cashing out of their homes at inflated prices to the low and mid income group.

Homeowners that purchased in the past few years are now dealing with very large mortgages for properties that aren’t worth that much. The extra money, which is just over $500 more per month for the median 2006 homebuyer compared to where the median house price “should” have been at the time, is not going back into the economy in other areas. That can’t be good.

People are going to take a hit, a big one. Banks are going to fail. Hopefully Congress and Federal Prosecutors go after those that were responsible for the unrealistic and possibly illegal lending practices and subsequent reselling of these lending instruments, to reclaim some of the profits they gained to mitigate the taxpayer funds that are going to have to be used to clean up the mess.

It has gone on for too long. Lets just stop it now and focus on rebuilding.