The Post editors are people who are constantly surprised by expected events. I could imagine a Post article headlined "Sun Rises This Morning." Naturally they were caught by surprise by the current problems in the mortgage market. They were probably too busy worrying about the Social Security shortfall projected for 2046. Today the Post editorialiized (reasonably in my view) against allowing Fannie Mae and Freddie Mac to play a larger role in the mortgage markets. However, the editorial is written from the standpoint that the problem is only in the subprime mortgage market. Of course the problem is in the housing market more generally. We had an unprecdented run-up of 70 percent in real house prices over the last twelve years. Typcially house prices have been flat in real terms. This has led to an enormous oversupply of housing. The inventory of unsold new homes is more than 50 percent above its 1990 peak and the number of vacant ownership units is almost twice its previous peak. This is guaranteed to put more downward pressure on a housing market in which prices are already falling. The situation will only get worse with tightening credit weakening the demand side of the market. As prices decline, more homeowners will find that they owe more than the value of their home, which will make default a very inviting option. The reason that most defaults have been in subprime thus far is primarily because these people have little or no reserves on which to draw when they run into problems paying their mortgages. But the underlying problem is falling house prices and this will affect homeowners across the board. Maybe if the Post didn't rely so much on David Lereah (the author of Why the Real Estate Boom Will Not Bust and How You Can Profit From It) it wouldn't be so surprised by the problems in the housing market.
--Dean Baker
