Still looking for the bottom

A "rebound in (home) prices is considered necessary to boost consumer optimism and help revive the economy," The Associated Press reported this week. "A home is the largest and most important financial asset for most Americans. So, as values climb, homeowners feel wealthier and more comfortable spending."

In fact, a stabilization in prices -- at a far lower lever than during the recent bubble -- could indeed indicate the market has found bottom, that prices again reflect an equilibrium in supply and demand, and thus a recovery may be underway.

But covering up your symptoms doesn't mean you've found a cure. The problem is that propping up prices at artificially high levels through government interventions only creates the illusion of a recovery, while the real recovery -- which depends on prices falling until enough willing buyers show up to liquidate excess capacity -- is delayed by the false signals generated by such "well-intentioned" interventions.

In February, home prices nationwide posted their first annual increase since the end of 2006.

But even that pathetic 0.6 percent gain -- half what analysts had expected -- was helped by temporary tax credits for home buyers.

Prices are up 12 percent in San Francisco, best performing city in the index. But government land use restrictions have always made housing artificially scarce and pricey in San Francisco.

Nationwide, current prices are now 30 percent below the May 2006 peak. And have they fallen enough? Apparently not. Eleven of the 20 cities tracked by the Standard & Poor's/Case-Shiller home price index, released Tuesday, still showed home-price declines from February of last year.

Las Vegas saw the largest annual price drop in the country, at almost 15 percent.

Unlike other U.S. businesses, which whittled down inventories during the first two years of the recession, the correction in the housing market was postponed as banks failed to evict and foreclose as quickly as possible, apparently due to perverse regulatory incentives to pretend such "non-performing assets" were all hunky-dory.

Should banks now proceed to unload these properties en masse, it could overwhelm demand and push prices down again. "The bottom line is that we're still fighting an uphill battle against a shadow inventory of foreclosures," explains Daniel Alpert, managing director of Westwood Capital LLC.

Home prices may fall further.

The question is -- have government interventions, designed to slow the correction, really helped? Wouldn't it have been better to let things shake themselves out as fast as possible?