Real Estate: The New "Don't Ask, Don't Tell"

According to an article in the New York Times, New Yorkers are dealing with falling real estate values the old fashioned way: denial.

Let's not forget that falling real estate prices are good. Yeah, let me say that again: falling real estate prices are good.

Falling real estate prices remind us that homes are not investment goods, they are consumption goods. That will help us make smart investments in actual businesses that produce actual stuff. Homes don't produce anything, you see, so there's no good economic reason why the price of homes ought to go up faster than the rate of inflation. Does your car go up in value each year?

Falling home prices make real estate affordable again, for those who want to own. Owning vs renting is always multi-dimensional question, having as much to do with your preferences for responsibility and maintenance as it does with your propensity to move and the tax advantages of the mortgage interest deduction. The point is, not everyone is or should be a homeowner, and that's a good thing. When home prices reach a reasonable and affordable level (the median home price should be about 3 times the median income, maybe as high as 4 or 5 for a big city) then those who want to own don't have to use the mortgage equivalent of financial derivatives to afford housing.