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The Housing Bubble Continues to Burst

by Robert Reich --

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The National Association of Realtors said today that home prices have now dropped to the point where they've wiped out all the gains in housing prices since 2004. 2004, not incidentally, was when interest rates last hit bottom, and the Feds looked the other way while mortgage bankers began shoving money out the door to anyone who could stand up straight and many who could not. In other words, 2004 marked the start of the housing bubble.

Should we take comfort from this? A bit, except for the fact that housing still has a way to fall because boomers will be cashing in their homes over the next few years -- buying smaller condos or, if necessary, rentals, for their retirement years. (Even though fewer and fewer boomers will be able to retire, they'll need all the cash they can get). That means still more homes on the market, including all those bigger ones that were built when the boomers were having families. And more homes on the market means still lower prices.

In truth, home prices first began to rise more rapidly than rental prices in the 1980s, when boomers hit the housing market big time. So, demographically speaking, there may be even a longer way to go before the housing market hits bottom.

Meanwhile, younger people who might otherwise consider buying a home are waiting on the sidelines. Either they can't get a mortgage loan (the banks continue to hoard) or they assume housing prices will continue to fall and are prepared to wait.

All this raises questions about how long and how much the federal government can mitigate the mortgage crisis. Obviously, it can do much more than it's doing now -- which is remarkably little, given the $350 billion that Hank Paulson has already burned through. But as housing prices continue to deteriorate, the number of home owners who are under water -- owing more on their homes than their homes are worth -- continues to rise. A portion of them will walk away from those homes, dragging down home prices around them.

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Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.

This article first appeared on Robert Reich’s Blog. Republished with permission

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