The case for letting basic economics stabilize the housing market

I've often said that there are two ways to look at the housing market: as an individual investor and in the aggregate. These days, that means that although you may despair at seeing your paper equity evaporate as home prices decline, that's actually good for the housing market. It's also what Douglas C. Neff and Gerd-Ulf Krueger recently opined for the L.A. Times:

Although no one likes foreclosures, they are serving a number of valuable purposes, which are barely cited by the media or politicians. They are establishing a sustainable and affordable pricing floor, albeit low, in many markets. And before we label the prices as unduly low, we should note that they are returning pricing to the 2000-2002 pre-bubble levels. Foreclosures are also letting some borrowers out of very bad contracts, which often committed them to crushing monthly payments on loans unsupportable in the post-bubble pricing market... So what does the government need to fix at this point, when the market has almost completed its pricing adjustment work?...We have a simple suggestion: Congress or the states could pass laws that protect mortgage security servicers from lawsuits, giving them the freedom to negotiate new terms with the borrowers if that's what both parties want...

The fact is that some very important things tend to get done by tens of thousands of individuals who are already dealing with a huge range of individual situations: repricing housing, investing in the future and clearing the decks for an eventual recovery. It's called Economics 101 at work, and it's setting the stage for stabilization of housing in California.
Of course one trend whose impact remains to be seen is the huge crush of investors of foreclosed homes who plan to sell once prices start to rebound. Will that result in a second stage of pricing declines and more foreclosures? This is a topic I tend to discuss for an overview of the state housing market that will accompany the April report from the State of California Controller's Office. I will link to this report from the blog once it is published online.