The Housing Bubble

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The Nightly Business Report. “Susie Gharib: ‘Our guest tonight believes this new government plan could help end the housing crisis. Joining us now, Mark Zandi, chief economist of moodyseconomy.com. Gharib: Why do you think this plan is going to work this time? So many of the previous ones just didn’t work? Zandi:…’Up to this point, it has been about temporarily reducing the interest rate to get the monthly mortgage payment down, but not really doing anything about the fact that many of these homeowners are so deeply underwater, and many of the homeowners — they’ll take the modification if you give it to them but if anything goes wrong in their financial life, you know, even if they spring a leak in the roof and have to put some money in, they’re not going to do it. They’re going to default. Now with these changes, this gives incentives for mortgage servicers and owners to reduce the principal amount that is owed, and also get that monthly mortgage payment down. And I think the combination is very powerful and it will keep those homeowners in their homes and help solve this foreclosure crisis.”

“Gharib: But I’m sure you’ve seen the statistics of the government reports that have just come out where more than half of the people who got loan modifications on delinquent mortgages within nine months, they defaulted again. So it makes you wonder, is there a flaw in all of these attempts by the government? Zandi: Yes, and that’s what this is aimed at, at that very specific problem, Susie, that high re-default rate. Because, you know, people who don’t get any break on the amount of mortgage debt that they owe, if they’re so deeply underwater, they have a very high likelihood of re-defaulting in the future. But if you give them a hook, if you give them a little bit of reduction in the mortgage amount that they owe and they think they have a fighting chance to get above water again, then they are going to hold on and they won’t re-default.”

“Gharib: I’m sure you’ve heard that a lot of American tax-payers are angry over this issue. You know, they’re asking, why should we have to help out irresponsible bankers and borrowers and bail them out? You know, I just — why is it that these banks and borrowers should get a free ride?”

“Zandi: And a very reasonable concern. I mean, it isn’t fair…But here’s the point, that by helping these other stressed homeowners getting help with their mortgage and staying in their home, and not pushing that home on to the market and causing house prices to decline, you’re helping yourself. So helping your homeowner, it is — it’s distasteful, it’s not the greatest — helping the person that is distressed is… (inaudible)”

“Gharib: I get that argument, but the question is, is why do the tax-payers have to be part of the solution? Why not have the banks work this out? Why not all of the banks get together and work out a foreclosure solution? Zandi: Well, unfortunately, they’re not…So the problem is we have this massive foreclosure crisis with lots of homes on the market with prices falling. So with a little bit of tax-payer money we can solve the problem, get past it and get going.”

“Gharib: And I know this is really important, getting this housing crisis solved because it’s important for the economic recovery. Do you think that this will help the recovery? Zandi: Yes. I think this is necessary. I mean, it could be the case we could let the chips fall where they may and see what happens and house prices may not decline. But here’s the concern, that we could all be wrong. That we do — if we don’t do anything, the foreclosures will mount, the house prices will decline, and we’re back in recession. And we just can’t allow that to happen because the unemployment rate is 9.7 percent and we’ve lost 8.4 million jobs. We just can’t go back into recession. So I think with a little bit more help — and I think this is the right kind of help, that we can end this foreclosure crisis, bring the house price declines to an end, and get going here, create some jobs and we’ll be off and running.”

The New York Times. “The angry comments flooded in after the federal government announced it was expanding its program to assist unemployed homeowners, as well as borrowers who owe more on their mortgages than their homes are now worth. It made me think about what would be at stake if the government did nothing at all. A government should consider the greater good over the long term, of course, and not just the immediate question of what is fair.”

“Still, the commenters raised a number of valid questions about the mortgage assistance program. Is the government just propping up the real estate market? Shouldn’t the market just run its course? And why do renters always fall so low on the economic totem pole?”

“But, let’s not forget that many distressed homeowners were the victims of bad timing, poor understanding of the loans they were signing up for and a slumping economy. Many families stretched themselves too thin so they could buy into the American dream of home ownership — an idea supported by both Democrats and Republicans, not to mention the tax code. And some people simply had the misfortune to buy at the top of the market in precisely the wrong area.”

“‘It shouldn’t be something people should be punished for,’ said Robert J. Shiller, the Yale economist who helped develop Standard & Poor’s Case-Shiller Index of housing prices. ‘It was a national mistake. President Bush, in his weekly radio addresses, was extolling the benefits of homeownership. Implicit in this, he was telling people they were doing the right thing to take these highly leveraged mortgage loans. We can’t reasonably think people should be punished for doing that when there is a crisis that is not of their doing.’”

“‘It isn’t completely fair, but we are helping a large number of homeowners who got into this foreclosure nightmare through no fault of their own,’ said economist Mark Zandi. ‘The odds are just too high that if we didn’t do something like this, the housing crash would continue on and undermine the recovery.’”

“‘Nothing in our economy does all that well when house prices are declining,’ he went on, ‘because it’s still the most important asset in the family balance sheet.’ Beyond that, he said: ‘No one will extend credit while home prices are declining. Further declines will push more homeowners underwater, resulting in more foreclosures and more house price declines.’”

From Marketplace. “Mitchell Hartman: Earlier mortgage relief efforts tried to help victims of sketchy lending who were defaulting left and right. Now, says Nicolas Retsinas of Harvard University, the effort has shifted to victims of the economy itself. People who have been laid off will be able to temporarily lower their mortgage payment to a third of their monthly income — usually their unemployment check. But there’s a bigger problem looming, says Retsinas. Retsinas: ‘People are underwater, they owe much more than the home is worth. And that’s added a whole new lexicon, the language of ’strategic defaults.’ Why should I pay if I owe more than the house is worth?’”

“Michael Russell is so underwater on his house outside Minneapolis, he could use scuba gear. He’s already tried to get the bank to lower his mortgage payments. Now, he’s trying to sell, hoping the bank will take $50,000 less than he owes. I told him the new federal program to reduce his principal might actually help him hold on to his home. Michael Russell: ‘I’m just not sure how many hoops I have to jump through in order to actually get approved and how long it’s going to take.’”

“Nicolas Retsinas says if a lot of people do jump through those hoops and get to write down their principal, the administration could pay a different price. Retsinas: Political push back: The person next door saying, ‘Well, I played by the rules, I paid my mortgage, why can’t I get some relief in what I owe?’”

“Tess Vigeland: This week the Case-Shiller Index delivered a sliver of optimism. Home prices rose by a third of a percent in January, in large part thanks to a bump here in California. That news comes on the heels of an effort by the Obama administration to help more folks stay in their homes. But there’s still the question of whether any of this means much.”

“Ed Leamer, director of the UCLA Anderson Forecast. Thanks for joining us. VIgeland: First, let me ask you a question that I’m asking just about every housing expert that we bring on the show. Where do you think the market is right now? Is it in recovery? Is it still dropping? Leamer: I think that there has been a stabilization. There hasn’t been significant appreciation. This market isn’t going to get healthy again till we get the buyers back. It’s a chicken-and-egg problem, because the buyers are not going to come back until they’re confident that home prices are going to stabilize.”

“Vigeland: Or the very least, not go down. Leamer: Yeah. And normally, if you get a sale, a lower price, people will rush out and buy more. But when it comes to homes, when the prices fall, buyers are thinking, ‘Well, I think maybe another price cut could be coming around the corner here,’ and nobody wants to buy that property.”

“Vigeland: There have been all kinds of efforts to get the housing market going again, and none of them seem to have had much traction. What are your thoughts on this latest plan to reduce principal on mortgage payments for folks who are underwater?”

“Leamer: Yeah, I have mixed feelings about this, because we qualified individuals who don’t really belong in homes.”

“Vigeland: They couldn’t afford the mortgage.”

“Leamer: Exactly. So the right program is not to try to desperately hold those people in homes, but rather to encourage them to become renters, and facilitate the process by which these homes are turned from owner-occupied homes into rental units.”

“Vigeland: You know, part of the concern recently has been about adjustable-rate mortgages. You look at a lot of folks who took out, say, a 5/1 ARM back in 2005 or a 3/1 back in ‘07. Now it’s set to adjust, and the theory is it’s going to create a lot more homeowners who can’t afford the mortgage, but so far that’s not happening, right? Leamer: Yeah. Ben Bernanke has been very kind to those home owners by giving us these incredibly low interest rates, so that they are the basic and switch the adjustable mortgages adjust. That’s likely to exist for some time, but not that long. Home owners who have mortgages that are these adjustables, need to start thinking about what’s the right time to lock in the longer term mortgage.”

“Vigeland: Yeah, I guess it’s just hard to make yourself do that, because right now, your mortgage rate might actually be dropping. Leamer: Yeah, it’s very seductive. That’s what got us in trouble in 2004, 2005. The teaser rates didn’t come from Wall Street, they really came from Washington D.C. and the Federal Reserve.”

“Vigeland: And finally, you know this past week, the Federal Reserve stopped buying mortgage-backed securities from Fannie Mae and Freddie Mac. Give us a sense of why that is important, and what it means for folks who are in the housing market? Leamer: If no one wants to be a lender for the home prices that are declining or potentially declining, Federal Reserve widely recognizes that problem and became a lender, in effect by buying these mortgage-backed securities, hoping I suppose that the market would become regular again. I think there’s some considerable risk in the short run that the absence of that Federal Reserve support is going to be raise interest rates.”

“Leamer: And possibly discourage people from buying homes. But the thing to understand is that nobody’s buying a home, unless they have some feeling of urgency there, ‘If I don’t get it now, I’m not going to get it.’ And that urgency comes, because you think home prices are going to go up. But it can also come, because you think mortgage rates are going to go up. So it’s not crystal clear what the threat of increased mortgage rates will do to the housing market.”

From CNN Money. “Attention shoppers: You have barely a month left before the homebuyer tax credit expires. First-time homebuyers may qualify for up to $8,000, while those who are trading up could get as much as $6,500. But either way, buyers have to ink sales contracts by the end of April and close before July 1 to see the refund.”

“There is little sentiment for continuing this program, especially because many consider the latest iteration’s results to be disappointing. Even the Senate’s biggest proponent of the homebuyer tax credit, Johnny Isakson, R-Ga., is ready to let it end. ‘He has no plans to introduce legislation to extend the credit,’ said Isakson’s spokeswoman. ‘Part of the benefit of the tax credit was the urgency its sun-setting generated.’”

“That urgency was less pronounced after the latest extension, which was enacted last fall. While the first version, which just covered first-time homebuyers, netted huge sales jumps, the real estate market slumped over the winter and early spring. That may be because some people believed that Congress would just keep adding time to the game clock, according to Nicolas Retsinas, director of Harvard’s Joint Center for Housing Study. ‘The credit’s influence and impact has waned considerably,’ said Retsinas.”

The LA Times. “A national index of home prices rose unexpectedly in January, with California cities posting strong gains, but some experts warned that the nation’s struggling housing market could be headed for another fall. But expectations about housing’s direction remain mixed as a series of government initiatives intended to bolster sales and stabilize values begin to expire.”

“‘Forces that will bring home prices back down are mounting,’ said Patrick Newport, an economist for IHS Global Insight. ‘Our view is that despite this report, prices have further to fall — about another 5%.’”

“The Case-Shiller index, which covers three months of data, was influenced by a sales surge in November, when buyers rushed to take advantage of a federal tax credit for first-time purchases before its initial expiration. Sales fell in December and January, even though that program was expanded and extended through April. Though many economists expect the extended tax credit to give sales a further boost, they also expect another fall once the government incentive ends.”

“‘It is way too early for this market to have rebounded the way it has,’ said Christopher Thornberg, principal of Beacon Economics.”

“‘What people are seeing in the stock market, and what people are feeling, is the beginning of a real recovery,’ said Karl E. Case, a professor at Wellesley College in Massachusetts and co-creator of the index. ‘Now that the economy is starting to come back, I think the psychology has changed,’ Case said.”

“Richard Green, director of the USC Lusk Center for Real Estate, said Southern California was showing strength because it was one of the earliest markets to get hit and is rebounding now before other areas. ‘We fell first, we fell deeply and we didn’t overbuild the way other parts of the country did,’ he said. ‘And if you look at the long-term horizon, the amount of housing built relative to population was less than other places, and it is still really hard to build new houses here.’”

“Thornberg attributed the gains primarily to the federal government’s programs and said most of Southern California’s housing gains were a result of fewer foreclosure properties on the market. The falling number of available foreclosures is pushing prices up on lower-end housing, though prices continue to fall in more-expensive neighborhoods. ‘The bottom has been surging up,’ Thornberg said. ‘It really is about the low end.’”

From News 10. “The monthly increase for the San Diego housing market was 0.4 percent. Prices jumped 5.9 percent between January 2009 and January 2010, according to the report. San Diego’s price index of 156.95 reflects appreciation in value of nearly 57 percent in the past 10 years.”

“In Los Angeles, the monthly jump was 0.9 percent, and the annual hike was 3.9 percent. The index now stands at 172.98, or appreciation of nearly 73 percent during this decade, the second-largest behind Washington, D.C.”

“‘The report is mixed,’ said David Blitzer, the chairman of the Standard & Poor’s Index Committee. ‘While we continue to see improvements in the year-over-year data for all 20 cities, the rebound in housing prices seen last fall is fading.’”

“Fewer cities experienced month-to-month gains in January as did in December, and prices in four cities reached new lows, Blitzer said. He also said housing starts remain extremely low, the numbers of home sales show the market is still difficult, and there are still concerns about future foreclosures and a large ’shadow inventory’ of unsold homes.”

The Washington Examiner. “While housing prices aren’t where they were during the peak of the boom, they have recovered from their lows. Over the past few months, Mary Bayat, a broker in Alexandria, said she has seen both sales and prices increase. ‘D.C. and Virginia are really going fast,’ she said. ‘We have a lot of foreign investors buy in D.C.’”

‘Prince William County, which was inundated with foreclosures several years ago, is showing signs of recovery; the median sale price for a residential home, including condos, was up 31 percent in February from February 2009, according to Metropolitan Regional Information Systems Inc. Still, despite the apparent minirebound in some areas, analysts remain wary about the region’s housing prospects.”

“‘Housing starts continue at extremely low levels, recent reports of home sales suggest the market remains difficult, and concerns remain about further foreclosures and a large shadow inventory of unsold homes,’ said David Blitzer, chairman of the index committee at Standard & Poor’s.”

“The shadow inventory and its potential effects is difficult to quantify, he said, but ‘one expects that it will be impactful.’”