Anthony Sanders is a senior scholar at the Mercatus Center at George Mason University.
We are in the fourth year of the slowest economic recovery following a financial crisis since 1882, and we have experienced a catastrophic downturn in housing prices since 2008. The rapid rise in unemployment, combined with declining house prices, resulted in a large increase in mortgage delinquencies and defaults. This left the housing market in a state of shock.
Despite an agonizingly slow economic recovery, the housing market is showing some positive signs: Mortgage interest rates are nearing an all-time low, home prices are on the rise in many areas, and the most recent housing starts report was a welcomed and positive surprise.
Unfortunately, America's housing market is still facing three key roadblocks that could derail the road to recovery: 1) Uncertainty over tax increases and the impact of the new healthcare law; 2) continuing lack of credit for mortgages; and 3) ongoing unemployment: U6 unemployment/underemployment continues at 14.7 percent and the mean duration of unemployment is at 40 weeks. To have a vibrant housing recovery, we need faster job creation and less labor market dropouts.
Additionally, there are still more than 2 million homes that have gone through foreclosure, but are waiting to be released into the market for sale. So while there is a lack of supply in the current market, there is a large inventory biding its time to be released that will put downward pressure on housing prices—again. We still have a negative equity problem that continues to plague homeowners, particularly in the sand states of Arizona, Nevada, California, and Florida. Housing prices have to continue to rise to get homeowners out from under their mortgage burden. Finally, economic growth above 1 percent would be tremendously helpful for housing recovery and employment. Rising real GDP growth is associated with great job creation—the bigger the better.
The Federal Reserve has been very aggressive in lowering Treasury and mortgage rates (although the European debt crisis has helped lower mortgage rates). This action has been mostly helpful in promoting the Obama administration's 14 loan modification programs (such as the Home Affordable Modification Program and the Home Affordable Refinance Program), but less so in promoting purchase mortgage lending for the average household. With tight credit standards remaining and millions of households suffering from lower credit scores following the recession, a sustained recovery is a wild card.
We are seeing improvement in the housing market, but we have to get consumers back into the market rather than just simply investors and corporations purchasing distressed property.
Something needs to be done to get businesses hiring again. Without improved economic and employment growth, this recovery could be a "firefly" recovery: weak, and it only lights-up at certain times.