Obama Gets High Marks for What He Hasn't Done on Housing

President Barack Obama resisted pressure to implement housing policies that would have damaged the market.

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Stan Humphries is a chief economist at Zillow.

Well, the election is less than a week away, and housing has barely been mentioned by either presidential candidate, either on the stump or in three presidential debates. That's too bad given the centrality of the housing collapse in the Great Recession and the fact that negative equity afflicts about 15 million home owners in the United States right now. Since the candidates aren't going to debate one another on these issues, we figured an alternative approach would be to score the president in the area of housing policy ourselves.

We've had ample opportunity over the last four years to observe Obama's approach towards housing. I personally believe that a) his policies have not been particularly material to the ultimate magnitude of the housing recession; but b) there aren't other policies out there that would have done any better; c) the president's policies, while not stopping the overall decline in home values, have helped a substantial number of people caught up in the maw of the housing recession; and d) folks suggested a lot of policies that, if implemented, would have really damaged the market. So, the president gets high marks for what he hasn't done despite pressure to do so.

[Check out our editorial cartoons on President Obama.]

Obama's policies haven't substantially changed the magnitude of the housing recession

The reality in any asset bubble is that prices are too high and have to fall. The fundamental trajectory of this housing recession was already pre-determined before Obama took office, and, more specifically, by 2006 when home values in most of the bubble markets reached their zenith. From that point, values had to correct back down to levels consistent with fundamentals like rents or incomes. And, having incurred home value declines of more than 20 percent during the course of this correction, widespread negative equity was unavoidable. In turn, high negative equity paired with elevated unemployment was guaranteed to create enormous numbers of foreclosures (more than 4 million to date). This sequence of events is almost axiomatic from an economic perspective. There aren't other policies that would have done much better

This assertion almost flows directly from the first. If the underlying dynamics of the housing correction were pre-determined by the preceding housing bubble, there's not much that could be done to prevent a price correction and the associated consequences (negative equity and foreclosures, most importantly). I hate to be a policy nihilist here but, honestly, there just aren't many good options for escaping fundamental market corrections. Most options involve some really substantial departures from a capitalist, free enterprise system that end up not working in the end—ideas like, say, mandated price levels (to keep prices high) or forgiving everybody's negative equity in order to stem foreclosures (about a $1.1 trillion proposition currently).

[See a collection of political cartoons on the budget and deficit.]

Do you want to know what really stopped the free-fall in home values? The fact that home values finally fell to levels consistent with rents and incomes (in fact, overcorrected when adding in the effect of historically low mortgage rates) and that investors—small and large alike—entered the market in droves beginning in late 2009 in order to satisfy the burgeoning rental demand being fueled by the foreclosure crisis. These investors began to account for a sizable portion of purchase demand in hard-hit markets, thus helping to stabilize prices. Investors  are being slowly supplanted by increasing numbers of mainstream buyers attracted back to real estate by high affordability (in three quarters of markets, buying beats renting in less than three years) and improving economic conditions. The president's policies have helped people

The president's two signature policies in the housing domain have been the Home Affordable Modification Program and the Home Affordable Refinance Program. There have been just over 1 million modifications under the Modification Program, far short of the 3 to 5 million modifications the administration was hoping for. The Refinance Program has been a bit more successful with about 1.5 million mortgage refinances done through the program. The real impact of the Refinance Program has been in the model that it established for refinancing underwater borrowers, a model that has been borrowed by separate initiatives established by many lenders themselves which have performed many more millions of refinances.