6 Ways to Fix the Housing Market

Housing is dragging the nation's economy down. Here's how to prop it up.

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Not even the blistering summer heat has thawed the housing market, which has been kept frozen for two years by underwater homeowners and tight credit. Every month brings new numbers and guesses about when the thaw will come, and Thursday's data on new residential construction will shed some light on the health of the U.S. housing market. [See a slide show of 6 ways to fix the housing market.]

The annual rate of new housing starts has been bouncing around between 500,000 and 700,000 for the last two years. In April, that rate was at 523,000, and May's figure is not expected to change drastically. That range is is alarmingly low compared to the high of nearly 2.3 million new starts in January 2006 as well as the rates of the late 1990s and early 2000s, before the peak of the housing boom, when starts averaged around 1.6 million per month.

Other recent housing statistics are discouraging as well. The March Case-Shiller composite housing price index for 20 major U.S. cities showed that housing prices have dropped by 32 percent from their 2006 peak. And home prices may have yet to hit bottom. Speaking at a conference in New York last week, Yale economist Robert Shiller, cocreator of the Case-Shiller Index, told an audience that home prices may still drop by another 10 to 25 percent.

According to experts, a variety of factors could be key to dragging the housing market out of the doldrums: improved economic fortunes, greater assistance to indebted homeowners, and simple patience may be necessary to remove this heavy weight on the economic recovery. Here are six ways to help speed the recovery of the U.S. housing market. [See a slide show of 9 cities where home values are holding strong.]

It's the Economy, Stupid

Fixing the rest of the economy first is admittedly more easily said than done. But the key point is that housing will most likely follow, not lead, the rest of the economy out of a slump. "Housing prices are going to be driven by the health of the economy," says . "It's become a following indicator. ... In the past, housing was a major part of the economic expansion."

Jobs are perhaps the area of the economy most inextricably linked to the housing sector. Mark Zandi, chief economist at Moody's Analytics, says that jobs are the most significant weight on housing right now. "People can't buy a home unless they have a job or are confident that they will hold onto a job," says Zandi. And people with homes that cannot sell are limited in their mobility and cannot cast wide nets in their job searches. Additionally, the housing market's poor health, and particularly the lack of new housing starts, is making the construction industry one of the toughest in which to find a job. [Check out a roundup of political cartoons on the economy.]

Trim the Fat

Earlier this month, Federal Reserve Vice Chairman Janet Yellen told an audience at the Cleveland Federal Reserve Bank that housing recovery would take time. She elaborated, "Even once it begins to take hold, recovery in the housing market likely will be a long, drawn-out process." Even with fixes to the rest of the economy, some economists estimate that full recovery will take as long as five years.

One reason behind that long recovery period is the excess of vacant homes on the market. Even once credit is freed up enough for would-be buyers to begin house-hunting in earnest, the market will have to be cleared of those empty properties before home-building can pick up again. Shrinking the oversized supply of housing will also better allow housing prices to increase, so current owners will be more able and willing to sell their homes.

Depend on Uncle Sam

Zandi says that governmental intervention options are limited given the current political and budgetary constraints. But one low-cost option would be to maintain the current limits on conforming loans, which are mortgages that are equal to or less than the conforming loan limit set by the government. Starting in 2008, the government temporarily increased the limits on these loans. But on October 1, the loan limit will drop again to the permanent limit. The increased loan limits were generally established on a county-by-county basis, and in some places, the decrease that will happen on October 1 will be substantial. For example, in some places designated as "high-cost" areas, the maximum loan will drop from $729,750 to $625,500. Zandi estimates that the new loan caps will affect 5 to 10 percent of the housing market nationwide, particularly high-priced markets like the Northeast and the West.