This is interesting. Why do you think the prices of homes will go up and not have significant downward pressures in a credit restricted environment? Or am I reading your post wrong?
PS - I voted it up by the way because everything else strikes me as spot on.
It's not that the price of homes is going to go up - it would likely go down as we're seeing now. The difficulty of buying property is likely to increase.
So, with a good banking system, I can afford a $300,000 home. The banking system collapses and that home is now $200,000. The only problem is that without a good banking system, I can only afford a $50,000 home because without a mortgage, I can't pull together $300,000 or even $200,000. This becomes a problem for renters because the number of people who can afford to become landlords/ladies decreases. Where you had plenty of people who could buy a place with a commercial loan and pay it back over time from rental income, now you need people that can pull together cash.
Something is only expensive if it's hard for me to buy. A $10 dinner isn't expensive in absolute terms, but try selling that to the majority of Sub-Saharan Africa. Likewise, if home prices decrease, but the difficulty of getting a loan increases by more than that, it becomes more expensive to buy a home.
I'm hoping this won't get so bad so don't read this as my money is evaporating. Economics can be a delicate balance though. Very good question!
We're seeing that here in the UK too, along with the widespread belief that if prices fall more people will be able to get on the property ladder. It's economic naivety of that sort that got us into this mess in the first place.
Right. That makes more sense to me. In dollar terms the prices go down. In value terms, they sky rocket. Cheaper houses that no one can afford would be my guess at what would happen as well.
I really hope that doesn't happen and I don't think it will for more than a few years. People react harshly to news - they think there is more significance than is really there.
I think the most likely result is that mortgage loans are going to see stratification in price - borrowers with high salaries and good credit histories are going to see little to no negative change with possible positive change; borrowers with low salaries and poor to mediocre credit will see loans they can't afford.
Partially, this came about because we (and by "we" I guess I mean US politicians) wanted to extend home ownership to more people - specifically historically disadvantaged people who didn't have access to the loan terms that those brought up as upper-middle class have access to. It's a laudable goal and one that we should try again in the future (albeit in a different way).
Since someone will probably ask what other way: One example of that would be to allow double deductability of mortgage interest to a certain mortgage value. So, let's say median home value is 300,000. If you allow a double deduction up to 150,000 in value, people with the median home see no change. People buying lower-valued homes see a positive increase in their ability to purchase that home - and that positive increase is paid for by the rich people in million dollar homes who can't deduct all their mortgage interest anymore.
Macroeconomics is complicated. My best advice is to be prudent yourself, live within your means, and not get caught up in the trends of people who think the economy is collapsing or that golden ages will never end.
PS - I voted it up by the way because everything else strikes me as spot on.