The NYT's attachment to the idea of a house price support program is truly bizarre. Somehow, they seem to have not noticed the $8 trillion housing bubble. While it is true that the deflation of the bubble is at the core of the country's current economic problems, how does the NYT think that the government can keep house prices at bubble inflated levels. At present, there is a massive oversupply of housing which shows up in the inventories of unsold new and existing homes, as well as record vacancy rates. How does the NYT think that this oversupply can be reduced unless prices fall? Suppose the government subsidizes the purchase of homes to make the inventory affordable at current prices. This can temporarily reduce the backlog, albeit at a considerable expense to the government. But, if prices stay at current levels, then construction will resume at excessive levels and we will again generate an excess inventory of homes. This would require even larger subsidies in future years, unless the NYT wants to have restrictions on housing construction to limit supply, like restrictions on the production of wheat or corn. The government could maintain such restrictions on supply, but this sort of unaffordable housing policy would lead to large economic distortions. (Builders might hide housing as office buildings, or alternatively would pay off officials to be allowed to build housing without authorization.) If the idea is that we will just temporarily maintain bubble-inflated house prices and then let fall at some future date, then we are just putting off the pain and encouraging another group of home-buyers to be suckers, paying far more than their home is worth. It is hard to see as good policy. The NYT should read its columns trashing farm price supports. If they substitute the word "house" for "farm," they would probably have a pretty good argument as to why today's editorial is misguided, although the potential damage in this case is likely to be a couple orders of magnitude larger.
--Dean Baker
