The S&P Case-Shiller report showed home prices dropped another 3% to 4% in the nation’s twenty largest markets in April. The amount was 7% or worse in five markets compared to April of last year. Many economists said there is no end in sight for the rapid drop. Mr. Shiller says values could drop another 10% this year.

There has been a debate for at least three years about what destroyed the US economy and what continues to damage it. GDP has not recovered enough to affect joblessness much. The unemployment situation has cascaded into consumer spending. The cycle then causes retailers and manufacturers of consumer goods to lay off more people. Other businesses will continue to keep their own spending  low.

Another theory about the long stretch of poor economic results is that Americans lost hundreds of billions of dollars in home equity as unemployment rose and the values of houses fell. Americans used their homes as piggy banks for years. The home equity industry grew rapidly. Now, more than a quarter of the mortgages in the US are underwater. People usually cannot sell homes on which they owe more than their houses can fetch. The real estate market has become gridlocked.

It is worth remembering that the one program that helped buoy real estate prices was the set of tax credits for home buyers that expired a year and a half ago. Home prices were more stable then than now. The federal government allowed the program to expire for some inexplicable reason. It may be that the plan lowered the taxes some people paid because of the credit. Whatever the reason, home prices began to drop once it was over.

The argument for new austerity programs is that a lower US deficit will keep the interest rates on Treasuries low compared to what they might be in a decade if current spending programs continued. A larger deficit means that debt service could be $800 billion in a decade. Interest paid on Treasuries could be a meaningful part of the budget then. Austerity is an antidote.

The argument against austerity is that stimulus programs are the only way to reignite the economy. Neither the stimulus argument nor the austerity position may be accurate. Stimulus is hard to aim at the weakest parts of the economy. Austerity plans may be regressive.

The one part of the economy which could be easily helped is housing. Aid to homeowners is controversial, raising many uncomfortable questions. Why should people be bailed out for bad decisions? Why should people who were greedy enough to leverage their homes for money receive help from the US government particularly because the costs of a bailout would be astronomical? Why should banks be forced to cut the principles due on homes to cut mortgage payments and give people back equity?

The answer to all of these questions is that there is no problem more significantly at the center of the destruction of the American economy than real estate. Home values may not have been the cause of the recession, but they are a very large part of why the recession has not ended or is only barely past. And, home aid is singular in its target. The question is what the means to improve the housing market should be.

Austerity programs will probably be a portion of the settlement that will raise the American debt cap. New taxes may be as well. Neither will help home values, which means that the one thing readily identifiable to help the American economy will not be addressed.

Douglas A. McIntyre

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