Arnold Kling  

Ed Yardeni's Proposal for the Housing Market

Footnote of the Day... My Segment on Stossel...

He writes,

the Homestead Act that Carl Goldsmith and I proposed this past summer. It would provide a matching down payment subsidy of up to $20,000 for anyone purchasing a home as their principal residence for two million houses. It would provide tax-free rental income for 10 years to anyone who purchases a house to rent for another one million houses. That would eliminate the current overhang of unsold homes completely.

I am not sure about the mechanics of this, but the idea seems to be on the right track in terms of getting the housing market back to equilibrium. The problem is that it does not address the cosmic injustice of the fact that millions of people bought homes with little money down because they thought that prices always go up, and things did not turn out that way.

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COMMENTS (10 to date)
effem writes:

I personally would rather the economy feel "fair" than be "healthy." Just my preference.

Costard writes:

One-off events like this eliminate supply, but they also soak up demand. You'll be driving prices in the wrong direction and setting the table for yet ANOTHER crash in prices. In terms of equilibrium you've accomplished nothing; you've merely added another loop to the roller coaster.

Pablo writes:

What about the cosmic injustice that banks recklessly leveraged up (all the big investment banks were 30:1!) and were all bailed out either directly or indirectly?

RonB writes:

Ed Yardeni is wrong, there is no cosmic injustice involved, only the market. You place your bets, you take your chance. Make no mistake, buying a house with no down payment is a high risk bet, not an investment, that the price will go up. Anybody with even a short sense of real estate history, or physic? knows that what goes up must come down.

Joe Cushing writes:

There is no cosmic injustice here. People just lost in the market. Besides, if you put no money down and continued to cash out equity, you didn't lose anything anyway--you gained. You got to borrow money to buy consumer goods and not pay it back.

Ryan writes:

Excuse me? What am I missing?

How does a massive government housing subsidy return the market to equilibrium? Wouldn't that merely keep real estate prices high at the very moment they are correcting to equilibrium?

rpl writes:

And will responsible people who bought houses they could afford with reasonable down payments be able to "sell" their houses back to themselves and collect the $20,000 subsidy? If not, then I'd like to suggest that that is more of a "cosmic injustice" than any of the factors mentioned in the post.

SWH writes:

Whoever is holding AK captive, let him out and stop blogging in his name. "On the right track".......??? Huh? As Costard says, this sort of government messing with the market (the government knows better, Arnold?) will certainly result in later market imbalance and more cosmic injustice for us all.

Danno writes:

Will someone please define the term "cosmic injustice"? What makes an injustice a cosmic one?

Arthur_500 writes:

Ed yardeni has made a career of saying that the New paradigm is such that the markets will always go up and never go down. Low interest rates, low inflation, and free Fed Policy are what he has based all his claims on for thirty years. It seems that the "new Era" turned out pretty much like every other boom and bust.

Baby Boomers have been "saving" like a vengance? Actually it turns out that most of those savings were in the form of real estate. any time you get everyone on the bandwagon the bandwagon undergoes stress and breaks. We call this situation a Bubble or a Boom but any child will tell you that what goes up must come down.

Of course, if Ed Yardeni promotes intervention to save the housing market I am sure he has a plan to make money off it.

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