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.
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.
Now, while a massive housing recession was destined to happen with or without the Modification Program or Refinance Program, it's clear that these programs have helped ease the pain of millions of homeowners caught in this wrenching process and have done so in a relatively tax revenue-neutral way. Personally, while I believe that without the Modification Program and the Refinance Program we would have had more foreclosures, I also believe that the investor dynamic would have been commensurately larger. For each additional foreclosure, there would have been another sale to an investor looking to chase rental demand freshly augmented by one additional newly minted renting household that formerly owned a home. From a strictly economic perspective, the outcome for home values of foreclosing on that homeowner might actually have been similar to the outcome had we prevented the foreclosure. But the consequences for that family and our social fabric overall would not have been the same in these two scenarios and, thus, I believe we did the right thing by helping families stay in their homes when reasonably possible. Calling this effort a failure is like saying it's a bad idea to call the paramedics to the scene of a car crash. Sure you can no longer prevent the crash, but it's definitely possible to help some people at the scene.
Importantly, I don't believe that the absence of these programs would have brought about a quicker end to the housing recession.
It should be pointed out that the Federal Housing Administration played a critical role during the housing recession, providing a countercyclical supply of mortgage lending during the worst of the storm. While purchase originations of conventional mortgages in 2009 dropped to one fifth of their 2006 levels, the Housing Administration lending quadrupled over the same period of time, affording mortgage access to millions of homeowners who would not have had it otherwise. It's not entirely clear to me, however, whether the increase in Federal Housing Administration lending during the downturn was due to explicit policy direction of the Obama administration versus the wise policy of previous administrations who put into place a countercyclical mechanism like the Federal Housing Administration and the fact that demand shifted to this open channel of lending during the recession.
The president has eschewed a lot of bad ideas
Finally, while there's not much policy-wise that could stand in the way of market prices finding their own natural equilibrium, there are a lot of policies that were suggested that would have been distinctly counterproductive. These bad ideas include broad moratoriums on foreclosures (which would have introduced market uncertainty without changing the ultimate resolution of the properties), programs to allow the government to directly rent out homes whose owners were in default (which would have chilled the private investor interest in this market), and wholesale forgiveness of all negative equity (which would have either bankrupted taxpayers or destroyed all future investor interest in mortgage-backed securities).
One bad idea he did pursue was the federal home buyer tax credits which I believe needlessly spent almost $30 billion on people who were already going to buy homes anyway. In the grand scheme of things, though, we could easily have walked down much darker alleys. The president should get some credit for resisting many of these bad ideas, championed loudly in some quarters, and for steering what has turned out to be a pretty centrist course with respect to housing policy (which has ultimately defused it as a politically powerful issue for Romney).
In closing, it does present an interesting question as to how we grade a person's handling of an event that is largely outside of his or her control. While I don't think there was much Obama could do to change many aspects of the housing collapse, I give him high marks for creative policy innovation that probed ideas to see whether they might help while not wasting enormous sums of money on things that didn't help, for not intervening in significant ways in the natural market correction (except in the case of robo-signing when laws were being broken), and for helping those people for whom a little bit of assistance could actually make a difference (without opening the wallet wide for those who didn't need the help or who couldn't benefit from the little bit of help the government was able to offer).
- Read David Brodwin: Tax 'Uncertainty' Argument Is Just Absurd
- Read David Balto: Barack Obama Is the Clear Choice for Antitrust Enforcement
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