Has the housing bubble deflated yet?

Rather than trying to jumpstart the housing market, should President Obama just let it crash?

(Image credit: Corbis)

last updated 11 January 2015

Home sales plunged this summer despite low-interest rates, tax credits, and other government efforts to jumpstart the market, rekindling fears that the housing market still hasn't hit bottom. Some economists are even advising that the Obama administration step out of the way and let home prices crash, so the recovery can begin. Is there still a housing bubble?

It's mostly deflated: If housing were a staple, like food, prices would have much farther to fall, says David Leonhardt in The New York Times, because they would have to fall back to where they were before the bubble, adjusting for inflation. But Americans really treat houses like luxury goods, spending more as they earn more. Incomes rise faster than inflation, so prices are no longer "terribly overvalued."

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Sorry, there's more pain coming: Leonhardt's way too optimistic, says Felix Salmon at Seeking Alpha. Mortgages are at record lows, but "they're going to rise." A $2,000-a-month payment at 4.5 percent buys a $530,000 house, but at 6.5 percent the same buyer can only afford to spend $368,000. "That's a 30 percent decline." And with more houses coming on the market every day, today's prices are just too high.

The bubble's over — but that doesn't mean prices won't fall: "I do not believe that housing has bottomed yet," says Barry Ritholtz at The Big Picture. The "worst of the collapse" appears to be over, but homes might still be overvalued by as much as 15 percent. Prices might drop that far, or we might just drift with "no real gains" for as much as a decade. Your house is no longer a hot investment — but at least you can live in it.