Is a bursting housing bubble an opportunity?
March 2006
In an article for the New York Times David Leonhardt proposed that we should stop worrying and see the opportunity offered by a bursting housing bubble (requires registration).
Recalling the real estate slump of the late Eighties, Leonhardt claims that many people didn't lose their homes and in fact it offered an opportunity for home buyers to purchase homes they would otherwise not have been able to afford. He goes on to propose that the current slump should undermine the myth that "we should all be rooting for high house prices".
The article claims that most have not locked in their gains in home prices and that is why the recent housing boom has not made many people rich. Any profits would just go towards the purchase of a new home.
He claims that increased borrowing against rising home values is not that much of a problem, citing Mark Zandi's assertion that only 10 percent of americans have mortgage debt equivalent to nine tenths of their homes value. Leonardt does accept that much of economic policy is based on the need for higher home prices but concludes that lower home prices would benefit the 30 percent of americans who do not own a home, plus those groups negatively affected by continually rising prices.
This view has been criticized by Paul Kasriel who claims that a housing bust would have a large impact on employment levels, leading to a large enough cut back in spending to create further unemployment in sectors unrelated to the real estate industry.
He suggests that housing is more leveraged that it was at the late Eighties and there is a higher level of variable rate and sub-prime borrowing. Were these mortgages to re price at the higher rate it would be likely to increase defaults, leading to further price declines and increased inventory. He also warns how this would impact commercial banks who have a record exposure to mortgage debt.
If the housing bubble bursts it may well create opportunities but it is not clear how many could take advantage of them.
Technorati tags: housing bubble | Real Estate | economics | business | investment
