I'm pretty sure we can't, for several reasons. The first is that a lot of economists (and me) think that the housing market has quite a bit further to fall--but perhaps Glenn Hubbard is right and they are wrong. But the second problem is that I don't think what we're seeing is simply a matter of excessively high interest rates. ARM rates (that being what the problem mortgages mostly had) are not high right now.

I think we're seeing a lot of problems that low mortgage rates won't fix: a supply overhang, as Arnold points out, and people who need to sell in order to move or downsize after a job loss. But mostly I think the problem is that the housing market, and homeowners, had not merely become dependant on easy credit, but on expanding credit. House prices two years ago were founded on the implicit assumption that the homeownership percentage would keep rising, not merely stay steady. And it can't rise any more, or even stay where it is, without putting a lot of people into risky loans.

Risky not because they necessarily have a high interest rate, but because when you own a house, you're very illiquid. If you need to sell quickly, to move or downsize, you can end up in big trouble. The way we used to protect against that illiquidity was to require big downpayments--traditionally, 20% of the house. That way you could be virtually assured that you could, if you really had to, get out without involving the bank.

Some of the problems in mortgage markets are because of resetting interest rates. But a lot of the problems are because people are hitting financial hardship, or they need to move for some other reason. In the olden days, people in trouble could take out home equity loans to tide them over, or sell the house. But with negative equity, they can do neither. If someone has lost their job, lowering their mortgage payment from $1,000 to $850 is not going to help for long--and indeed, getting into that sort of program will probably take longer than they have.

The only way to really stabilize markets is to somehow build up home equity. But such a program is both incredibly expensive, and politically ludicrous--are you really going to give people tens of thousands of dollars outright because they took out a mortgage they couldn't afford?

Beyond that is the problem of how the government manages all these loans. They will, definitionally, be the ones to the borrowers most likely to default on even the newer, cheaper mortgage. Foreclosure is said to cost banks 25-50% of the price of the house; it will not be cheaper for the government.

Whether or not it should, there are certainly situations where the government can prop up prices artificially. But the housing market is too big, and too dislocated, for that to work at this point. The supply curve and the demand curve will find each other--and given the overhang of new construction, I'd guess that in the near future, they'll meet at a point even lower than we're seeing now.





