Housing prices dropped by over 11 percent at the beginning of this year, the largest drop in the 20 years that such data have been collected. Thank goodness.

Restoring Financial Sanity

Why are plummeting real estate prices good news? Because it’s the first sign that sanity is returning to the market. And a sane real estate market—one in which sellers recognize that they won’t get as much for their house as Al down the street got two years ago—is a precondition for a broader economic recovery.

Recessions, or any economic downturn, are always caused by the same thing: Something goes wrong. That may sound overly vague, but it’s rarely the same thing that causes a shock to the system. In an agrarian society, it might be a bad harvest or a failed monsoon season. In a developing country, it might be a slump in the global price of a major export, such as coffee or copper.

In the United States in 1929, it was the stock market collapse. In the early ‘80s, it was the recession deliberately engineered by Fed Chairman Paul Volcker to break the back of inflation. (The Fed held interest rates high enough for long enough that the economic pain persuaded workers to stop asking for higher wages, and firms to stop raising their prices.)