The Perverse Reason Home Prices Are Rising

By Jordan Weissmann

Doesn't it sometimes seem like every time there's good news about the economy, it comes with a big, infuriating catch? 

Take housing. Over the last few months, economists have been noticing glimmers of good news out of the real estate market -- signs that home values may have finally bottomed out and are now turning a corner. There are more buyers and fewer houses sitting around on the market. And according to new stats from from Fannie Mae and CoreLogic, prices kept chugging higher through June, as illustrated in the chart below. 

  

CoreLogic_June_House_Price_Index.jpg

If the trend holds, it would be a blessing for the economy, which has been held down by a veritable housing depression. But here's that catch I mentioned. One of the reasons home prices are finally on the march, it seems, is that so many homeowners are underwater on their mortgages. Roughly 23 percent of borrowers owe more to the bank than their houses are worth -- which means selling isn't really an option. As the Wall Street Journal explains today, that's kept the supply of available houses down, even as demand has gone up. 

So the housing market is getting better for some homeowners, largely because of the financial misfortune of others. A bit perverse, huh?

Should prices rise enough, some of those underwater homes will suddenly be worth enough to sell. That could be trouble for the market if there aren't enough new buyers out there ready to snap them up. If there are, we're in the clear.

But this also raises an interesting public policy issue. Liberals -- myself included -- have advocated letting Fannie Mae and Freddie Mac do wide-scale mortgage principal reductions  as a way to get the economy back on its feet. On the one hand, that might be good for families' finances. But on the other, it might mean of a flood of new properties with for-sale signs on their lawns, which could knock prices back down. That, of course, is that last thing anybody needs right now. 

This article available online at:

http://www.theatlantic.com/business/archive/2012/08/the-perverse-reason-home-prices-are-rising/260888/