Should We Let the Housing Market Crash?

In the summer of 2010, an unexpected drop in buying houses has put the U.S. housing market over the limit. For a year and a half, the Obama administration has tried every tactic in the book to fix the fear of buying a new house in this down-turned economy among job losses and pay cuts. The result? Unfortunately, the housing market is still failing, Americans are not buying houses, and housing prices are not rising.

What seems to be the problem? Americans are simply not willing to take the risk of buying a house, even with an $8000 or $6500 incentive. Our job losses and income reductions are still causing us problems with our monthly bills, debt repayment and wealth accumulation. We simply do not want to take the risk of defaulting on a new house. First and foremost, a new house would be our home. We have no intention of moving in with high expectations and creative hopes when we might lose it, suffer humiliation and have to move in with a friend or family member while we get back on our feet.

Would a housing crash really cause problems? A small percentage of economists are worried that seeing a 10% or more drop in the value of a house would cause many current homeowners to allow their house to default, and get out while they can. These experts fear that the negative repercussions of widespread defaulting would be far greater than any benefits arising from a temporary housing crash.

This is unlikely, however, due to the fact that many Americans have so many resources and emotional development and income invested in their current houses that they would simply keep what they have and watch the market change. Many smart homeowners would wait to see the results of the crash before they act, because the possibility of increasing the value of their home in the long-run certainly has its advantages.

What would a crash in the housing market entail? Allowing the housing market to crash would involve a withdrawal from the government of any stimulation or incentive packages and a withdrawal of any precautionary measures to at least keep the market at its current value. This would allow the value of homes to drop to their natural and "organic" level, prices would stabilize, buyers would act, and eventually the value of all homes would increase to a level which is higher than their current level today.

It would be more beneficial at this point for the Obama administration to pull out all of the stops and halts on the current monetary inflation and allow that to crash as well. Prices would, in a matter of months if not weeks, stabilize, the economy would return to its former growth, and the value of the dollar would significantly increase. This would increase the value of the dollar in relation to foreign currency, thus stimulating U.S.-foreign relations, and bring about friendlier business with other countries. However, this is probably too much to expect of any bureaucratic agency, since it involves letting go of control.

Sources:
http://www.nytimes.com/2010/09/06/business/economy/06housing.html?pagewanted=1&_r=1&hp