Today, Obama announced his housing rescue plan. It basically boiled down helping out "responsible" home builders by giving them access to low cost financing so long as they are not too underwater on their mortgage. It also created some incentives for lenders to modify loans for "at risk" homeowners who are in danger of defaulting.
All of this will be in vain. I really just do not understand how others, supposedly smarter people do not understand this. Let me try to explain in very small words.
Rising housing prices is bad. If housing rises faster than incomes, then you are pricing out a class of people, new homeowners. People who get happy when the price of their primary residence rises are foolish. It does absolutely nothing for you if everyone's house is rising in price as fast as yours. If you sell your house, you are going to buy another one. Rising housing prices will in fact hurt you because you pay taxes as a percentage of your house's value. You also pay closing cost and other real estate fees when you sell your house as a percentage of the sale. So you are paying more and more for each of these transactions.
Now, this may be just fine if you are in housing already. You can swap houses with other homeowners and pay more and more for that asset. But at some point, for the asset to really be worth more, you need outside money to come in and buy the asset from you. For you to "move up" you have to get someone to buy your starter home. How is this going to happen if your price is too high for the average person to afford? It won't.
This is a simple economic fact. Housing prices will not stabilize until an average family can afford the average house and we are still far away from that. Anything that attempts to prevent the housing price correction, such as this plan, is only stalling the inevitable. This plan does not and cannot create demand at the bottom. It actually does the exact opposite by keeping demand artificially low by keeping prices artificially high. The government can throw however many billions or trillions they want at the problem. Until someone addresses the question of how the average American can become a homeowner, prices are either coming down or we are staying flat for another dozen years.