Something very newsworthy is happening in the luxury Manhattan real estate market…….for the first time in many years we have experienced (while renting out an apartment in Tribeca) prospective, qualified renters withdrawing their applications after realizing that buying would cost almost the same as renting, and opting to buy. We have not heard this in YEARS.

“To-day, figures will be released for housing sales in July, and they won’t be great. New York is a different market though, so what is happening in the US is not necessarily what is happening in our area”, says Leonard Steinberg, managing director of Prudential Douglas Elliman. “Our recent rental experience leads us to believe we really have bottomed, and from here the market stabilizes and improves.” Recently released rental activity reports indicate a rise in rental property inventory: but these reports are not very specific. Some areas and property classifications are actually experiencing shortages which will boost the cost of renting. The days of cheaper rentals in prime Manhattan areas are fading fast, epecially for larger units. Combine this with the MTA’s quest for sharply raised fares and one has to wonder where deflation exists in New York. If anything, this is inflation.

In FORBES, columnist John Tamny says don’t fear the housing market……There’s a growing consensus that another economic contraction is likely if home prices in the U.S. dip. The thinking here seems to be that if prices decline, the resulting increase in foreclosures would weaken already shaky banks that would either fall into insolvency, tighten lending standards or both. With bank lending already down, renewed weakness would supposedly strangle a nascent economic recovery.

Scary stuff for sure, but also arguably overdone. Most would agree that heavy investment in the housing sector helped get us into the mess we’re in, so for housing worriers to suggest that an artificially enhanced property market is our cure is to get things backward.

More realistically, the mortgage defaults and resulting housing weakness a few years back signaled an economy on the mend thanks to markets correcting overinvestment in that space. If economic growth is the goal, the best thing we could do would be to let houses and mortgage securities find their natural, market clearing level.

To do otherwise, as in if Washington continues to use limited capital to prop up housing, would be for our federal minders to elongate what remains a painful economic downturn. A housing correction, far from limiting growth, would actually constitute economic revival for underutilized capital migrating toward more productive pursuits.

When an individual buys a home, there’s merely a transfer of wealth from one person to another. This is quite unlike the purchase of shares in a public company, or the deposit of funds in a bank where an individual is transferring capital to existing and future businesses eager to expand. To invest in housing is to essentially transfer capital into the ground, whereas when we save and invest we provide entrepreneurs with the means to expand.

This is important in light of the housing boom of not long ago. It’s once again assumed that a decline in prices from what remain high levels would be economically harmful, but it could more credibly be stated that the not-so-long-ago rally in home prices was the recession for limited capital flowing into unproductive assets of the earth over productive assets of the mind.

To make what transpired not long ago clearer, tomorrow’s Googles, Microsofts and Intels suffered a capital deficit amid the rush to housing, and builders gorged on the capital that passed them by. This was no accident; rather it was the predictable result of policy from the U.S. Treasury in favor of a weaker dollar.

History shows that during periods of currency weakness, available capital flows into tangible assets least vulnerable to the aforementioned debasement. Ludwig von Mises referred to this phenomenon as a “flight to the real,” and it’s what has always occurred when monetary authorities seek a decline the value of the unit of account.

Looking at the decade just passed, the dollar’s impressive weakness drove up the nominal value of all commodity-like assets, with housing a natural beneficiary. Not only did this “money illusion” distort home purchases, but it ultimately created a housing glut as faulty price signals tricked developers and lenders into believing that home prices could only rise. Evidence of the overbuilding that resulted from monetary mischief is everywhere at present, with unsold and uninhabited homes dotting suburban landscapes across the country.

For the federal government to then use capital borrowed or taxed from the private sector to put a floor under home pricesnow would be for it to continue to distort real market signals on the way to more investment in housing. We’d be doubling down on an economic bet that previously helped put our financial system on its back.

The logical response is that intervention in the property space is necessary to maintain the fragile health of a banking systemthat would suffer mightily from another round of mortgage defaults. Fair enough, but this thinking ignores what little good the savior of Japan’s zombie banks did for its economy during its two lost decades, plus it grossly overstates the importance of traditional banks when it comes to the accession of credit.