Why Is the Administration Trying to Maintain Bubble-Inflated House Prices

The Post reported on the administration's mortgage modification program. At one point it presents an estimate Credit Suisse on the number of foreclosures that would need to be prevented this year to stabilize house prices. (The article put Credit Suisse's estimate at 3.2 million. This is obviously wrong since that is close to twice the current pace of foreclosure.) This implies that stabilizing house prices at levels that are about 15 percent above trend is desirable. That is likely to create a situation in which current homebuyers see their house prices fall in subsequent years as house prices are finally allowed to adjust to deal with the excess supply. It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes.

--Dean Baker

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