US needs more home buyers

The US politicians are devising economic stimulus measures to encourage consumers to spend more. These measures will cost taxpayers $200 billion or more. This is not money well spent. The problem is not too little consumer spending; the problem is too few home buyers.

Many argue that we do not need government intervention to bring the buyers back; we just need the market to work its magic through lower prices.

Well, not entirely. When it comes to housing, lower prices do not inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and construction too little.