What We’ve Learned: Ugly Truths About Housing

A reflection on lessons learned:

Most obviously, we have learned that housing prices can be extraordinary volatile. This was less obvious from previous housing cycles.... So let no one ever again say foolish things like housing prices never fall...

The second lesson of the housing debacle is that there is extraordinary pain in both housing price busts and booms.

When housing prices soared, ordinary Americans found it increasingly hard to afford a house... During the boom, I hoped that housing prices would stop rising and even decline.

Yet I didn’t understand the terrible impact that declining housing prices would have on our financial sector. While rising housing prices weren’t particularly good for America, declining housing prices were particularly bad for the country. The lesson seems to be that large swings in housing prices, in either direction, can be extremely painful...

The third lesson is that American housing policy has been monumentally foolish.

We have used public resources to encourage ordinary Americans to bet all they could on highly risky housing markets. Fannie Mae and Freddie Mac, the home mortgage interest deduction, even the willingness to bail out financial firms that had lost too much on mortgages, can all be seen as policies that encourage ordinary people to risk it all on real estate.

I had once thought that these policies were misguided, but not terrible. We now know that encouraging buyers and lenders to bet on housing can impose vast costs on the country...

Now that we have backed away from the abyss, we can consider making much-needed reforms, like reducing the upper cap on the home mortgage interest deduction, that could depress housing prices in the short run, but make future housing bubbles and crashes less likely.

No wonder more people are starting to rent. Something I've been advocating for years.