Harvard’s Ed Glaeser, also a Manhattan Institute senior fellow, and Wharton’s Joseph Gyourko have an excellent explanation (free registration required) of the likely futility of proposed government efforts to stop the slide in housing prices.

The profs specifically debunk the idea that the government can reduce the slide in housing prices by keeping mortgage rates artificially low. They estimate that

reducing mortgage rates to 5.25 percent [interest] through public lending … as suggested by two prominent economists last week, would imply a 69 basis point [0.69 percentage point] reduction. If the historical relationship between price and interest rates continues to hold, this fairly large credit market intervention will only manage to raise [house] price[s] by less than 3.2 percent. Such a boost would be almost imperceptible on the current extreme environment.

Glaeser and Gyourko also make the point that the real problem isn’t that prices are too low now but that they were too high — effectively unaffordable to middle-class families — a few years ago. They suggest dealing with the social costs of foreclosure-induced dislocation rather than trying to stop those foreclosures by propping up home prices.

Of course, another cost of allowing housing prices to continue to deflate is more bank and other financial-industry failures. But the faster the government explicitly admits that it won’t follow a policy of trying to prop up home prices, the faster financial institutions, investors, and the broader economy can calculcate and account for their very real losses.

Right now, there is real evidence that they have not done so. Consider: in its purchase of Wachovia, Wells Fargo is projecting 22 percent losses from a $119 billion portfolio dominated by “pick-a-pay” and other fantastical mortgages* backed by overvalued homes in the western United States. That’s up from Wachovia’s own 12 percent estimate from a few months ago, but it still may not be enough.

Government uncertainty about its attitude toward house prices could mean more bad surprises next year — when it might be better to get them over with sooner.

*Yes, that means exactly what you think, that mortgage borrowers could pick what they wanted to pay each month.

You may also like

New Data Confirm New York State’s Q1 Economic Plunge

New York's economy ended the first quarter of this year in virtual free fall, the latest federal data show. The Empire State's real gross domestic product (GDP) decreased 8.2 percent in the first three months of 2020 compared to the fourth quarter of 2 Read More

NY outlook: worse than 2008-09

#NYcoronavirus: The outlook for New York's economy is the grimmest on record, according to the first post-pandemic lockdown round of credible economic surveys and forecasts. Start with the Federal Reserve Bank of New York, whose regional economists today issued a notably pessimistic report based on their monthly Empire State Manufacturing Survey and a broader Business Leaders Survey that take sin the northern New Jersey and metropolitan New York. Read More

Session’s end clobbers NY economy

The closing days and hours of New York State’s 2019 legislative session were easily among the most economically consequential in Albany’s recent history—but not in a positive sense. Read More

NY’s ominous new rent regs

New York City's World War II-rooted "housing emergency" is now officially indefinite—and has spread, potentially, to every corner of New York State. But the potential negative impacts of the law won't be limited to the Big Apple. The law is likely to have a chilling effect on prospects for multifamily investment and development in struggling communities across New York—especially upstate. Read More

Key Cuomo budget update late—again

How big are the fiscal challenges faced by New York State in second half of its 2019 fiscal year? Are tax receipts and spending living up with projections? What's the outlook for the next few years? We don't know—because, for an eighth consecutive year, Governor Andrew Cuomo has missed the statutory deadline for producing a Mid-Year Financial Plan Update. Read More

A SALT cap surprise (so far)

The newly enacted federal income law provision limiting state and local tax (SALT) deductions "is likely to substantially decrease home values" in New York, Connecticut, Maryland and New Jersey. That's a key claim of the lawsuit filed by the four states against the Trump administration today with the goal of having the $10,000 SALT deduction cap declared unconstitutional. Read More

DiNapoli confirms: upstate sluggish

State Comptroller Thomas DiNapoli has just issued a report confirming what employment statistics have been showing: upstate New York's economy has lagged behind the nation and downstate regions for years now. Read More

Cuomo’s Southern Tier hype

For several years now, Governor Andrew Cuomo has been misusing employment statistics to back up claims that his policies have ignited an economic resurgence in upstate New York. It happened yet again today, when the governor was in Binghamton to announce that Dick's Sporting Goods had decided to locate a 650,000 square foot distribution center in the Broome County Corporate Park. Read More

Subscribe

Sign up to receive updates about Empire Center research, news and events in your email.

CONTACT INFORMATION

Empire Center for Public Policy
30 South Pearl St.
Suite 1210
Albany, NY 12207

Phone: 518-434-3100
Fax: 518-434-3130
E-Mail: info@empirecenter.org

About

The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.