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Wednesday, Nov. 16, 2011

America's housing woes won't yield to a quick fix


By ROBERT J. SAMUELSON
The Washington Post

WASHINGTON — We Americans think of ourselves as problem-solvers, but the housing collapse has so far eluded all solutions. Perhaps 10 million homes have gone into foreclosure since 2006; millions more will follow. From their peaks during the real estate bubble, home prices are down 30 percent; new housing construction has dropped 75 percent; and existing home sales are off almost 30 percent. Housing's collapse is one reason why the economic recovery is so weak. Construction remains depressed, as are the appliance and furniture sales spurred by home buying.

It may be that patience is the only cure. Home prices have to find bottom; only then will more buyers return. Almost all efforts to accelerate that process by stemming foreclosures have come up short of promises. The Obama administration originally hoped that its Home Affordable Modification Program (HAMP) — lowering some homeowners' monthly mortgage payments — would help up to 4 million borrowers; at last count, the number was 850,000.

Housing's collapse is usually laid to too much unsold supply, which depresses prices and construction. Normally, the inventory of unsold homes equals about six months of actual sales, says economist Sam Khater of market research firm CoreLogic. Today's inventory exceeds 14 months. This includes homes already for sale and CoreLogic's estimate of "shadow inventory" — homes in foreclosure or headed that way. Mortgage relief aims to help individual homeowners and prevent more houses from being dumped onto the market.

The huge overhang must be worked off, it's said. We shouldn't make matters worse. Fair enough. Unfortunately, the real problem is too little demand. One reason is that the recession curtailed new household formations — a key driver of demand. Young adults returned to their parents' home and crowded into group houses. Immigration slowed. Before 2008, household formation totaled 1 million or more annually. Since then, it's dropped to 400,000 to 700,000, says Dan McCue of the Harvard Joint Center for Housing Studies.

A larger cause of weak demand is the bubble's aftermath. Falling prices keep people on the sidelines. Who wants to buy a $250,000 home that may be worth $235,000 a year later? About 11 million homeowners are already "underwater" with mortgages that exceed their house value, estimates CoreLogic.

The scandalously lax lending standards of the bubble years have also been tightened. Down payments have increased; loans made without documentation of borrowers' incomes are gone. But some economists argue that lenders have overcorrected. "If (lending) standards just went back to normal, we'd have 10 to 15 percent more sales," says Lawrence Yun of the National Association of Realtors. Interestingly, Federal Reserve Chairman Ben Bernanke is in this camp, complaining that the Fed's low interest rates have been neutralized.

"One area where monetary policy has been blunted," he said recently, "has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes."

Finally, plunging prices of existing homes mean new homes need to get smaller and cheaper; otherwise, they'll be unattractive. This is slowly occurring. Since 2006, new homes have dropped about 5 percent in size. "Disappearing are formal living and dining rooms, two-story foyers and second staircases," reports The Wall Street Journal.

Home prices have to stabilize before many potential buyers will venture forth. Slowly subsiding mortgage delinquencies suggest the worst might be past. But the big supply-demand imbalance indicates another 5 percent to 10 percent price drop, says economist Patrick Newport of IHS Global Insight.

Can anything be done? The Obama administration is considering proposals to sell up to 200,000 foreclosed homes held by Fannie Mae and Freddie Mac to private investors, who would commit to renting them for a fixed period. This would achieve two goals, says Sarah Rosen Wartell of the liberal Center for American Progress. First, it would take properties off the market and help stabilize prices. Second, it would provide rental housing for the growing number of people needing it.

A more controversial idea is for lenders to reduce the principal of mortgages now underwater. It's argued that this would cut monthly payments and encourage people to stay in their homes, rather than defaulting, because they'd have a stake. But who would be covered? Lenders usually oppose principal reduction as inciting "moral hazard." Many borrowers capable of paying would maneuver to qualify for the write-down.

Americans assume that all problems have "fixes." But some don't. History suggests that it will be hard to overcome the housing bust's powerful undertow. Pent-up demand and attractive prices may be the only cure. Economist Khater has studied regional housing collapses and finds that it takes seven to nine years before prices regain previous peaks. If anything, he says, today's bust looks much worse.

© 2011 Washington Post Writers Group


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