Wednesday, November 12, 2008

Still Beating the Drum

A second round of calls for an individual home owner bailout went up this week. We shouldn't necessarily be trying to keep these homes out of foreclosure. Consider how out of whack home prices and personal incomes are right now. When Bill Clinton expanded CRA, home price appreciation accelerated while personal income continued to grow at a pace that was roughly equal to inflation. Just to put that in real terms, when homes were appreciating at 20% a year or more, personal incomes were growing at about 4% a year. Does anybody appreciate the significance of this? Does anyone understand that home prices need to come back to parity with personal income? Forget punishing he idiot homeowners who foolishly bit off far more than they could chew, they deserve it, but that is a debate for another time. Home prices have to retreat back toward natural levels with respect to personal incomes in order to avoid significant inflation. The only alternative to devaluing homes would be to massively inflate personal incomes, which would be good, except for the fact that the real gains in personal income would me negligible because the cost of everything else will increase with personal incomes.

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