Housing Double Dip? Unfortunately, Yes

Today's headlines from both the U-T and the WSJ report on falling housing prices. This was to be expected as the means of propping up the housing market run out of steam. Dean discussed the overuse of the word "unexpected" with respect to economic news in yesterday's post, but at least this news was not so labeled. I'd like to think that it is because I predicted this, but we know better.

Here is why Obama should demand his money back from Columbia and Harvard for failing to educate him on basic economics. His administration's policies of propping up the housing market only prolonged the recession. Further, it was inevitable that the market couldn't be propped up forever. This second collapse in home prices will likely trigger another bout of recession. Given the time it takes for falling home prices to affect the larger economy, we should be feeling those effects during the 2012 election cycle. This is why I have been feeling Obama is vulnerable for some time.

A better plan would have been to let prices fall to market clearing prices quickly in 2009. Then cash buyers would have piled into the market, spending money turning homes into rental units and jump starting the economy. Many people would have lost their homes, but they were mostly going to lose them anyway. How is it more humane to prolong the suffering in the economy? Obama could have blamed the initial fall on Bush, which might have even had the ring of truth, and taken all the credit for the inevitable rebound. Now he owns this double dip.

From the WSJ discussing the fall in prices.

That doesn't bode well for the economy, which historically has depended on home buying and other consumer spending to rebound. Falling prices hurt economic growth in a number of ways. Not only do homebuyers curb spending when their homes are losing value, but continued price erosion keeps families stuck in homes they can't sell because they are worth less than what they owe.
. . .

Declining home values, rising prices and unemployment continue to weigh on consumer confidence. Another wild card is wrangling over the debt-ceiling in Washington, where lawmakers remain at odds over raising the nation's $2.4 trillion cap.

The Conference Board, a business research group, said Tuesday that its confidence index fell to 60.8 last month, down from 66.0 in April, as Americans grew more pessimistic about the economy.

The loss of confidence is a leading indicator, unfortunately, and I fear for tough times ahead.