"An Inevitable and Necessary Decline in Home Prices"

Secretary of the Treasury Hank Paulson appeared Sunday morning on ABC’s This Week with George Stephanopoulos to address a range of difficult topics.  Paulson’s words sought to lend comfort, but his manner undercut any assurance they might have offered.paulson-on-this-week.jpg

To say Paulson appeared anxious and scattered is like saying the housing market has taken a slight breather from growth.  Paulson was a study in internal conflict, looking and talking as if he could barely contain a rising hysteria.

Stephanopoulos warmed up by questioning Paulson on the government’s plans to bail out investment bank Bear Stearns after their mortgage-backed securities went sour, threatening the collapse of the institution.  “My primary concern is the stability of our financial system, the orderliness of the markets,” Paulson stammered.  In less than 24 hours since then, events have unfolded furiously, with JPMorgan Chase & Co. agreeing to take over Bear for $2 a share, still backed by the Federal Reserve.

Stephanopoulos moved on.  “A lot of people look at the fact that the government now is funneling money to a major bank and say, ‘If you can do that with a bank, why not do it with strapped homeowners facing foreclosure?’

Paulson paid strenuous lip service to the notion that the administration was helping homeowners under financial stress.  “We’re working very hard to prevent those foreclosures that are preventable.   92% of the homeowners in America are making their mortgage payments every month on time, foreclosures are roughly 2% …  We have programs that are aimed at homeowners who want to stay in their homes .. and can afford to stay in their homes.  There have been over a million homeowners that have been helped through workouts through the administration’s proposals since July.”

But the market reality emerged at last.  ”What’s going on right now is an inevitable decline, and a necessary decline, in home prices,” Paulson acknowledged.  “From 2002 to 2006 we saw unsustainable home price increases, largely in four states, in Florida, California, Arizona, Las Vegas…you can’t have that kind of appreciation without having some sort of correction.”

Stephanopoulos leaned in:  “So no more government action right now?”

Paulson deflected the question.  ”I’m looking very carefully at any proposal. But all the ones I’ve seen, which call for much more government intervention, raise more problems and do more harm than they would do good.” 

Paulson unquestionably sits in a torturous hot seat, torn between those who demand that the free market be left to sort out the problem, and those who call for government intervention to cushion the pain.  In the end, though, whatever relief the government may offer to homeowners, the market will inevitably seek and eventually find its own level.