The Problem Is that Home Prices Are Too High

Karl Denninger nails it in his post today about the housing market, responding to Bill Gross’s recent comments (Gross said that as a private investor, he’d require purchasers to put 30% down, which, he clarified, isn’t feasible for most first time homebuyers).
I could cut and paste and blah blah blah, but hey – go read Denninger’s post.  Here’s the bottom line (my words, not Denninger’s):

The reason that people can’t afford to make real (that is: in the neighborhood of 20%) down payments is because, and I’ve said this many times before, home prices are too high – not because home prices need more stimulus/support/propping up. 

Ok, now I’ll give you the Denninger cut & paste:

“In point of fact the government should encourage prices to contract to affordable and stable levels, from which they should not vary materially on a forward basis.  This then turns homes into a place to live, instead of a speculative asset class.

Bill Gross says that the “cost” of a private system could be 300 basis points over Treasuries.  So what?

He says this makes housing “unaffordable.”  My retort is at what price?

Notice what’s not being talked about here: actually deflating the bubble, and returning homes to a price where Americans can actually afford them.”

Now, why don’t we do this?  Why don’t we let home prices fall to lower levels?  Why do we want home prices to stay inflated?  Well – that’s another question, and I think it gets back to the whole issue of pretending that the  Big Banks are still solvent.  If home prices fall, borrowers walk away, and banks get hosed on the loans they’ve written against bad collateral… Hence, policy is designed to prevent this reality.

disclosure:  long a home

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