Looking at a Healthy Housing Bust

Article excerpt

Just as busts follow booms, booms are supposed to follow busts. But there has been no boom, not even a boomlet, to light a candle in the gloom of the housing collapse. Many economists thought that a recovery from the real-estate meltdown that started in 2007 would be well on its way by 2011.

The unhappiness is understandable. But some extension of this pain would not be a terrible thing in the long run.

The latest news shows new home construction down almost 11 percent in April from March, and housing starts were off by 24 percent from a year earlier. The causes are weak demand in a tough economy and hard-to-get home loans, but also a heavy dose of negative reinforcement.

Negative reinforcement is a principle of behavioral psychology whereby repeated punishment reduces the likelihood that a human or rat will continue doing something. If whenever the rat hits a lever, he gets a shock, he stops pressing after a while.

A parade of shocks on the housing front is delivering Americans much negative reinforcement. And they need it.

An American mystique about homeownership has kept us ignoring history and going back for more and bigger houses. In the recent real estate bubble, consumers who couldn't afford it desired far grander digs than a simple nest with room for the chicks. They wanted media rooms, wine cellars and hotel-sized kitchens opening onto three-car garages.

And they had the federal government cheering them on. Washington has long let homeowners deduct mortgage interest from their taxable income, thus encouraging bigger home loans. It has kept interest rates super low, providing incentive to borrow larger sums. And in the boom, because homebuyers could borrow more, they could pay more for houses, thus launching real estate prices into outer space.

Only constant negative reinforcement will change a society that never seems to learn that homeownership is not the low-risk path to wealth and happiness. …