Removing the Economy's Housing Anchor

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Removing the Economy

The reverberations from the bursting of the housing bubble are still being felt, causing one of the biggest impediments to economic recovery.

In the aftermath of the bust, government actions have either been ineffective or have worsened the problem. Consider these three developments:

  1. The efforts that were supposed to deal with defaults and foreclosures have mostly transferred ownership of non-performing loans from private to government entities. Restructuring has been rare. This has made bank balance sheets look better, but did little to clean up the underlying mess.
  2. In 2009, the Obama administration launched a foreclosure-prevention program, meant to help 4 million homeowners avoid foreclosure. So far, it's helped only 522,000 homeowners. More critically, the program pushed many borrowers even deeper underwater by tacking on late fees and delinquent payments to their overall debt, raising the total amount due.
  3. Inventories of foreclosed homes aren't being absorbed by the markets because onerous lending terms make it possible for few prospects to qualify for mortgages, while the generally poor economy and fears of falling prices have made such a long-term commitment a forbidding proposition.
Foreclosures are Concentrated in a Few States

Foreclosures are Concentrated in a Few States

But, even in the face of these problems, there is reason to believe the housing market will begin to rebound within two years. There are at least two reasons for such optimism:

  • First, low interest rates, combined with low current prices, make home ownership more affordable than at any time in the past 40 years. At 30 to 35 percent off the 2006 peak, housing prices have fallen about 10 percent below "fair value," based on rents for comparable properties. Furthermore, these prices are at the lowest point, relative to replacement cost, in more than 30 years. Even if rates rise, they are likely to still be near historic lows. In terms of price, the big hurdle is that buyers are edgy and deciding to wait to see whether rates move up or prices move down.
  • Secondly, activity in the housing market is still quite weak, but we've made some real progress in reducing inventories and stabilizing prices...

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