Tyler Cowen wonders what happens if we let housing prices fall as "many smart people say we should."
Arguably many banks would once again be "under water." Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode. I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck. Housing prices must fall, yet...housing prices must not fall.\n
Cowen is pessimistic about the housing market (less so than Dave Leonhardt, to whom he links), and maybe rightly so.
I'm not an economist (though I do occassionally handle currency), but I'll weigh in that this question speaks to what seems like an overarching economic dilemma: For a lot of people in the country, home ownership is prohibitively expensive; paradoxically, rising housing prices are good for the economy at large.