The Volokh Conspiracy - The Upside of Falling Home Prices:

The Boston Globe has a good article on how home foreclosures in Massachusetts are allowing lower-income families to purchase houses in areas that were previously too expensive for them:

As devastating as it has been for families who have lost their homes, the foreclosure epidemic has presented an unusual opportunity for a small but growing group of buyers previously priced out of Boston's real estate market. Fernandes [a lower-income African immigrant], for example, got his building for $271,500, just two years after the prior owner agreed to pay $540,000 for it.

Immigrants and other property pioneers have long been a force in reviving downtrodden neighborhoods. But their purchases of foreclosed and abandoned properties are particularly crucial now because these new homeowners are key to stabilizing neighborhoods racked by the mortgage crisis...

Jose Cruz paid $255,000 in cash for a three-decker [in Boston] in April and invested $175,000 in rehabbing the apartments. He rented the units and says neighbors have congratulated him for his work. "The whole neighborhood is going to be better," Cruz said.

The building's previous owner bought it for $400,000 in December 2006 and financed the entire amount with two mortgages - a so-called 80/20 loan package that was popular during the boom years and is considered responsible for many foreclosures.

Those kinds of mortgages are now much harder to get. And while some buyers are borrowing the full value of the property - or more - they're getting homes at much cheaper prices than the prior owners paid.

When housing prices fall - especially in extremely expensive cities such as Boston - poor and lower-middle class homebuyers benefit. This point applies not only to the foreclosed properties discussed in the Globe article, but to other houses as well. For lower-income home buyers, it doesn't matter if they get a more affordable price because the house they're purchasing has gone through foreclosure or simply because real estate prices are down in the area more generally. Those lower-income families who rent and have no intention of buying a home also stand to benefit. Rent levels are sensitive to real estate prices; when the value of real estate in a given area falls, rents are likely to go down as well.

All of these points are straightforward applications of basic economics. When the price of any good falls, it becomes easier for lower-income consumers to purchase it. But this simple reality is too often ignored in the recent outcry over falling home values. It's important to remember that, in addition to making the real estate market more efficient, the bursting of the housing bubble has also created valuable new opportunities for lower-income families.

In Boston and other expensive cities, the government has for too long artificially propped up housing prices through restrictive zoning laws, government subsidization of dubious mortgages and other such measures. Left-liberals who have historically complained (with some justice) about the shortage of affordable low-income housing in these cities should be particularly enthusiastic about the recent decline in real estate prices. At the very least, the resulting benefit to lower-income families gives liberals - and the rest of us - additional reason to be skeptical about the desirability of government-subsidized efforts to prop up real estate prices by guaranteeing mortgages, bailing out lenders and borrowers, and other similar measures that seem to be politically popular at the moment. If we genuinely want to help the less affluent, we should let this market correction run its course.

UPDATE: I have revised the last paragraph to eliminate some poor phrasing.

	[Ilya Somin, August 19, 2008 at 3:26pm] Trackbacks The Upside of Falling Home Prices: The Boston Globe has a good article on how home foreclosures in Massachusetts are allowing lower-income families to purchase houses in areas that were previously too expensive for them: As devastating as it has been for families who have lost their homes, the foreclosure epidemic has presented an unusual opportunity for a small but growing group of buyers previously priced out of Boston's real estate market. Fernandes [a lower-income African immigrant], for example, got his building for $271,500, just two years after the prior owner agreed to pay $540,000 for it. Immigrants and other property pioneers have long been a force in reviving downtrodden neighborhoods. But their purchases of foreclosed and abandoned properties are particularly crucial now because these new homeowners are key to stabilizing neighborhoods racked by the mortgage crisis... Jose Cruz paid $255,000 in cash for a three-decker [in Boston] in April and invested $175,000 in rehabbing the apartments. He rented the units and says neighbors have congratulated him for his work. "The whole neighborhood is going to be better," Cruz said. The building's previous owner bought it for $400,000 in December 2006 and financed the entire amount with two mortgages - a so-called 80/20 loan package that was popular during the boom years and is considered responsible for many foreclosures. Those kinds of mortgages are now much harder to get. And while some buyers are borrowing the full value of the property - or more - they're getting homes at much cheaper prices than the prior owners paid. When housing prices fall - especially in extremely expensive cities such as Boston - poor and lower-middle class homebuyers benefit. This point applies not only to the foreclosed properties discussed in the Globe article, but to other houses as well. For lower-income home buyers, it doesn't matter if they get a more affordable price because the house they're purchasing has gone through foreclosure or simply because real estate prices are down in the area more generally. Those lower-income families who rent and have no intention of buying a home also stand to benefit. Rent levels are sensitive to real estate prices; when the value of real estate in a given area falls, rents are likely to go down as well. All of these points are straightforward applications of basic economics. When the price of any good falls, it becomes easier for lower-income consumers to purchase it. But this simple reality is too often ignored in the recent outcry over falling home values. It's important to remember that, in addition to making the real estate market more efficient, the bursting of the housing bubble has also created valuable new opportunities for lower-income families. In Boston and other expensive cities, the government has for too long artificially propped up housing prices through restrictive zoning laws, government subsidization of dubious mortgages and other such measures. Left-liberals who have historically complained (with some justice) about the shortage of affordable low-income housing in these cities should be particularly enthusiastic about the recent decline in real estate prices. At the very least, the resulting benefit to lower-income families gives liberals - and the rest of us - additional reason to be skeptical about the desirability of government-subsidized efforts to prop up real estate prices by guaranteeing mortgages, bailing out lenders and borrowers, and other similar measures that seem to be politically popular at the moment. If we genuinely want to help the less affluent, we should let this market correction run its course. UPDATE: I have revised the last paragraph to eliminate some poor phrasing.