Where's the Federal Plan to Tackle Crippling Housing Problem?
WASHINGTON — While lawmakers and the president scrap over deficit reduction and jobs plans, they're largely overlooking one of the biggest drags on employment and a major cause of our national economic woes: the moribund housing sector.
There's a growing cry in economic circles for new steps to revive this sector, which year after year has been the subject of optimistic predictions about soon hitting a bottom that turns out to be, well, bottomless.
New housing starts are hovering at 475,000 to 690,000 a year since the financial crisis exploded in late 2008. That's the slowest pace since record-keeping began in 1959, and a fraction of the 2.1 million homes built annually in boom times.
The number of existing homes for sale nationwide at the end of July stood at 3.65 million, according to the National Association of Realtors. That represents 9.4 months' supply at the current sales pace, an improvement from the record 4.58 million homes for sale in July 2008, but still a huge overhang of unsold homes.
On top of that, there are now about 800,000 lender-owned properties nationwide. Another 800,000 homes are in some stage of the foreclosure process, according to the foreclosure-research group RealtyTrac. There also are a staggering 3.5 million delinquent mortgages that aren't yet in the foreclosure process but are likely to wind up there.
Mortgage rates are at lows not seen in six decades, yet few Americans can take advantage of them, because anywhere from a quarter to a third of the homes that have mortgages are now worth less than the notes they carry.
Suffice to say, housing remains a whopping problem, and it's inseparable from the high jobless rate of 9.1 percent. The steep gain in home prices in much of the nation from 2001 to 2007 now is widely viewed as an unsustainable bubble. It follows that there was a corresponding employment bubble.
That's evident in the construction sector. From an employment peak in April 2006 of 7.726 million jobs, construction had shed 29 percent of those jobs, or 2.237 million workers, by the time it bottomed this January.
Since then, the sector has added only 46,000 jobs. Not all construction jobs are in housing, but many are. It's safe to surmise that construction workers make up a big segment of the 6 million Americans who've been jobless for half a year or longer.
Manufacturing saw a bubble during the housing boom, too, amid soaring demand for everything from wood floors and carpets to kitchen cabinets, lumber and lawn-care products.
"Housing market challenges continue to serve as a drag on manufacturing growth in a number of ways, both direct and indirect. First and foremost, housing starts are down from 2.1 million homes being built per year a few years ago to around 600,000 today," said Chad Moutray, the chief economist for the National Association of Manufacturers. "That means less demand for building materials for construction, and appliances and furniture for furnishings. But it also means that we have that many fewer people employed in the construction sector_ all potential customers for manufactured goods."
There's also a less-recognized hit from housing woes.
"The collapse of the housing market has left many Americans with upside-down mortgages, hurting their financial stability and preventing some of them from moving to other regions where they might be more prosperous," Moutray said. "As such, housing presents both cyclical and structural problems for manufacturers."
From the peak of hiring in January 2007 through the end of 2009 — a period that included the 18-month Great Recession — manufacturing jobs shrank by 2.3 million. Since then, the sector has added only 289,000 jobs.
You get the picture: Any significant uptick in employment would help housing rebound.
"Increased buying activity will reduce the glut of distressed inventory and take pressure off pricing, leading to price stabilization, minimizing the risk lenders face in making the loans, making loans easier to come by and further increasing the amount of buying activity," said Rick Sharga, senior vice president at RealtyTrac Inc. "That's an organically driven recovery, which unfortunately will probably take another three to four years to play out, in a best-case scenario."
Sharga and other experts want additional measures from the federal government to boost housing. One idea is to make it easier for buyers of distressed properties who are getting government-backed loans to work repair costs into the loans. This could help first-time homebuyers, who often have less cash available.
Another idea that's gaining steam has the government — which now controls mortgage finance titans Fannie Mae and Freddie Mac — relaxing rules in order to give incentives to large real estate investors. Currently, the two are limited in how many loans they can underwrite for individual investors, but Sharga argues that it makes more sense for Fannie and Freddie to help investors who could buy 20 or 30 bank-owned homes than individual homeowners, who'd bring down the inventory of bank-owned properties much more slowly.
A variation of this notion involves pressing Fannie Mae, Freddie Mac and the Federal Housing Administration to convert their inventory of foreclosed homes into rental properties. The idea, which the Obama administration generally supports, is to reduce the number of distressed sales that are crowding out conventional home sales and driving down prices. It also would boost property tax revenues for state and local governments.
An administration official, speaking only on the condition of anonymity in order to discuss policy options more freely, said that Fannie, Freddie and the FHA could help dispose of distressed property in a way that converted these homes into rental property and helped stabilize local home prices.
There are as many as 300,000 such properties, and hundreds of thousands more will come into government control in ensuing months and years. Converting them to rental properties could prevent them from further dragging down home prices and could promote home sales.
"It would be helpful if we could get a system in place now," the administration official said.
Ed Yardeni, a prominent Wall Street financial analyst, advocates a new Homestead Act, like the one that passed in 1862 to encourage the settlement of the West. He envisions a matching government subsidy of up to $20,000 for any homeowner who puts up at least the same amount and has been approved for a mortgage on a primary home. The program would be capped at 2 million existing single-family homes, with a cost of $40 billion.
"The basic concept is to target the housing industry and get the overhang of unsold homes off the market," Yardeni said in an interview.
To fund the program, he suggests allowing corporations to repatriate their foreign earnings parked abroad — estimated at more than $1 trillion — at a 10 percent tax rate instead of the usual 35 percent rate. He'd dedicate some of this returning revenue to spurring home sales.
Under the plan, real estate investors wouldn't get government subsidies, but their rental income would be free of taxes for 10 years. If they sold the properties to other landlords, the remainder of the tax breaks would be transferable.
This plan wouldn't fix one key problem: At least a quarter of U.S. homes that carry mortgages are thought to be "underwater," worth less now than the loans on the homes. Banks have been unwilling to refinance most of these homeowners, worried that prices could fall even further.
"I don't think we can fix that problem," Yardeni conceded. "I think we try to get as much as possible of the overhang. Let's get them off the market and maybe home prices firm up."
The National Association of Realtors backs a plan by Sen. Barbara Boxer, D-Calif., that would allow Fannie Mae and Freddie Mac to refinance loans they own or guarantee irrespective of how "underwater" they are. Current programs designed by the Obama administration restrict the two entities to refinancing mortgages in which the homes have lost no more than 25 percent of their original loan values.
"Naturally, a lower payment will mean fewer defaults and foreclosures. Furthermore, lowering the transaction cost to refinance will permit more owners to pursue a refinance," said Lawrence Yun, the chief economist for the group.