Monday, April 14, 2008

Lower prices needed

Ed Leamer gets his time in the sun.
Well, not entirely. When it comes to housing, lower prices don’t inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and construction too little.
Given that housing in the US is still dramatically above where it has been historically (yes, here is that graph again) it seems premature to worry about price mechanisms not working, and/or undershooting.

Leamer is keen to offer taxpayer money (of course) although the timing has to be exquisite:
Timing is important. If the rebate is offered too early, it will delay the adjustment we need to make, and push the problem into the future. If it’s offered too late, we risk creating another episode of overbuilding. The right time to do the stimulus is when the adjustments have been substantial but not quite complete.
Given that all government intervention, from mortgage regulation to interest rates, has been completely wrong so far, I'd be interested to know why Leamer thinks this latest handout will be different (if it happens).


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