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.
Zandi believes that in the long run, less government involvement in mortgages could be a good thing, but that the already-fragile housing market is not ready for the government to substantially reduce its influence. "I don't think that [decreased loan limits are] a bad idea, longer-run. In fact, it's a good way to try to get the government out of mortgage market, at least to start extricating itself from the mortgage market," says Zandi. "But it's probably premature to do that on October 1."
Don't HAMP-er the Recovery
The Home Affordable Modification Program, better known as HAMP, was established a part of the larger Troubled Asset Relief Program, or TARP. It was designed to help struggling homeowners modify their loans to be affordable. "HAMP has been a badly designed program, badly executed," says Stephen Malpezzi, professor of real estate at the University of Wisconsin. That sentiment was reflected in a report that the special inspector general for TARP presented to Congress in April. The report characterized HAMP as "beset by problems from the outset," many caused by mortgage servicers with "extraordinarily poor" performances in areas like evaluating which homeowners meet income requirements. Last week, the Treasury found Bank of America, J.P. Morgan Chase, and Wells Fargo to be in need of "substantial improvement" in their handling of HAMP modifications. As a result, the Treasury announced that it would withhold incentive payments to those banks until their performances improved. Meanwhile, homeowners seeking loan modifications must wait.
HAMP has long been criticized by economists and politicians alike. In March, the Republican-led House voted 252-170 on a bill to eliminate it.
Malpezzi is one proponent of ending HAMP. In its place, he advocates a program combining unemployment insurance and a temporary housing voucher program. He believes that such an initiative would cover those who HAMP has failed to help: unemployed people with mortgage problems. "For much of the last two years, the majority of foreclosures have been due to people who have reasonable mortgages but are unemployed," says Malpezzi. "HAMP simply doesn't work for the unemployed." He argues that unemployment insurance checks are rarely large enough to allow homeowners to both pay their mortgages and purchase basic necessities like food and transportation. Vouchers, then, would help homeowners to remain afloat financially while maintaining their mortgage payments. [See five reasons to be optimistic about the U.S. economy.]
Since the government gave billions of dollars to troubled financial institutions in 2008, "bailout" has become a dirty word in American politics. This fix involves bailouts not to large financial institutions, however, but rather to troubled homeowners. As early as 2008, Shiller advocated bailing out low-income victims of subprime lenders. Shiller admits that bailouts are not a palatable option: "Bailouts are not an ideal solution. They seem unfair. They are, in some sense, unfair. You are rewarding the people who took reckless risks in the housing market." However, he also believes that the continued housing crisis is deep enough to warrant such action.
Zandi specifically proposes expanding home-loan modification efforts to modify the principal amounts that some homeowners owe. He explains that reducing principal amounts for homeowners who are underwater could "give them a stake in their home again so they don't default." However, he recognizes that identifying homeowners who would be good candidates for such modifications would be difficult. [Read the U.S. News debate: Should congress raise the debt ceiling?]
Look to the Future
Creating a lasting recovery means learning from the mistakes of the housing collapse so that the country can avoid future crises. "The mentality of most people in confronting a crisis is to view it as just 'this crisis,'" says Shiller. "So we're in a ship that's damaged and may be sinking, so we're just thinking of anything to do to stop from sinking. But we should also be thinking about building better ships."
In Shiller's opinion, avoiding similar crises in the future means ensuring that neither individuals nor banks are so exposed to real estate risk as they were during the housing boom. One measure he advocates is to have "preplanned workouts" built into mortgages, providing homeowners with an agreed-upon way to modify their terms. This is one lesson that the United States can learn from HAMP, he says: "[HAMP was] trying to encourage workouts, and banks thought, 'If we do some of these, then everyone's going to want a workout." The solution, says Shiller, is to allow banks to make these modifications a part of their business models. "Let's get the banks to plan the workouts and price them out and make a business of a mortgage that has a preplanned workout," he says.