Get Used To It: House Prices Won't Bounce Back. Ever.

Just how old is the idea that the price of real estate only goes up? Certainly at least several centuries. Call it Ricardo's Mistake, after the great economist and preeminent theorist of free trade David Ricardo. Ricardo believed that land was the one scarce economic resource, and that over the gains of a growing economy would accrue only to landowners, a situation he proposed to remedy by a system of land taxes.

A year and a half into this down market, the notion that things have to go back up is still with us. A few days ago I wrote about the Obama administration's foreclosure plan . I still think it is a good idea. But even in the rescue plan there is hiding a core of the same thinking that led us to where we are. One hope of the administration is that five years from now, home borrowers who are underwater will no longer be. Or at least that's the hope implied by the plan of letting folks refinance their mortgages up to 105% and/or get a five year interest rate break from the bank. Problem is, after those five years are up, many of the same people will still be facing foreclosure (not all).

And it's not just the administration. Consider the plan put forward in Slate that would give banks a share in the future appreciation of a house for which they agree to take a haircut on the mortgage--the idea that banks can cut mortgage principal by 20 percent and make up most of their loss with an option on the future appreciation (a plan, by the way, similar to one that Barney Frank proposed some time ago) is pure fantasy. But it's a fantasy that's attractive because even at this stage many people are not prepared to stomach the thought that housing prices will not rise, on an inflation adjusted basis, for many, many years. Like John Updike's Rabbit Angstrom in "Rabbit is Rich" with his pile of gold coins, we hold to the idea that tangible property like a house, is the a guarantee of future income.

Having written so much about mortgages in recent months, by the way, I wonder if some readers are asking if I own a house. The answer is no. My ex-wife and I bought a co-op apartment in New York in 2003. Even at that time, prices seemed out of line to me, and I bought with some trepidation. My wife got the apartment in the divorce, and since then it has been sold. At a profit, I'm pretty sure.