The Federal Reserve has been trying to raise asset prices via low interest rates and quantitative easing program (money printing). One would figure the members of the Federal Reserve would be experts in economics yet the have consistently violated economics fundamental laws of supply and demand. Lets go through a brief review of economics 101. If supply of a widget is very low but demand for that widget is very high the price of that widget will increase. It will increase to the point where demand will begin to fall due to consumers finding alternatives or supplements. If supply were to increase but demand stayed the same the price of the widget will fall. Hey this sounds like what has been happening to oil.
If oil is left to market forces, eventually the price of oil will find an average settling price if no other factors change. As we know in real life shit always changes. Low oil prices will eventual kill off the weaker players thus decreasing supply assuming demand does not change which will generate a rise in the price oil. Seems logically right? So why not allow the market force to do the same for housing?
It makes sense the if housing prices fall demand for housing will increase. One problem is the Federal Reserve was created to take care of banks not the average American consumer. If housing prices were to fall, the average market value of the homes will be less than their mortgages. Some people will then stop paying their mortgage which will sink the banking system. Thus a market crash followed by economic depression will most likely occur.
Since the Federal Reserve will not allow banks to fail the average American get stuck in quagmire. The market forces cannot clear out the weaker players which can be banks, homeowners, home builders and financial firms. Potential buyers can locked out of the market because housing prices are too high for their level of income. Savers and retired people get screwed because the increase in money to keep housing prices afloat diminishes the purchasing power of their savings. This is very unhealthy for the long term healthy of an economy. Yes allowing the market to crash will cause a lot of pain in terms of jobs, wealth and crime but I believe the prices of housing and other assets will be so cheap that some people who saved will spend their money to buy up these assets. FDIC will buy out depositors of failed backs. If the FDIC trust fund goes bankrupt perhaps the Federal Reserve can print money to bailout savers so they can buy cheap homes. That will never happen because the Federal Reserve is a banking cartel.
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