Price Stabilization Is First Step to Recovery

Price Stabilization Is First Step to Recovery 
Home prices must stabilize before the broader economy can turn around, a panel of housing and economic experts said yesterday at a real estate summit hosted by the NATIONAL ASSOCIATION OF REALTORS® as part of its Midyear Legislative Meetings in Washington, D.C., this week.

Although there are encouraging signs in the housing market—including a pick-up of home sales in previously hard-hit markets, record affordability, and continuing low interest rates—prices have not yet hit bottom. 

That’s keeping many households on the fence and making it hard for those who do jump in to get financing in the conventional market. What’s more, it’s making it harder for troubled homeowners to refinance, leading to more distressed sales, and thus further erosion in prices.

Tax Credit Bridge Loans on the Way

To put a floor under the market, the federal government must continue to intervene, panelists said, and expanding the first-time homebuyer tax credit is a good place to start. The credit should be expanded to all households, including those with higher incomes, increased significantly in value, perhaps to $15,000 to $16,000 instead of the current $8,000. 

“Then it would start move real estate,” said Robert Sibcy, president of Sibcy Cline, REALTORS®, based in Ohio. 

In a positive move, the U.S. Department of Housing and Urban Development is set to roll out guidelines permitting HUD-approved lenders, public housing finance agencies, and some nonprofit organizations to make bridge loans to home buyers. The loans would be collateralized by the $8,000 tax credit, giving buyers the upfront funds for a down payment. 

The inability to use the credit for the down payment has been a major stumbling block for the tax credit. NAR has been calling for HUD to use its authority to allow the bridge loans. 

During the summit, HUD Secretary Shaun Donovan announced that HUD has decided to allow bridge loans, sparking a loud cheer of appreciation from more than 1,000 REALTORS® attending the session. 

“We want FHA consumers to access the credit to use as a down payment,” Donovan said. “I want to thank NAR for its partnership with FHA.” More details on the guidelines will be released in a few days, he said. 

Donovan said the credit is expected to stimulate 100,000 first-time homebuyer purchases and 60,000 move-up purchases this year before it expires Dec. 1.

Further Government Actions Could Help

The credit alone isn’t enough to spur sales, many panelists said. Barry Bluestone, a professor of political economy at Northwestern University, called for the federal government to step in for a defined period of time, such as 18 months, to insure buyers’ home equity. 

Providing protection against price drops would remove buyers’ reluctance to get into the market now, and since the program would be of limited duration, it could lead to a critical mass of households buying in the short-term and thereby shore up prices. Bluestone said he envisions the federal government insuring up to 85 percent of an owner’s home equity. 

“This could stabilize prices over the next 18 months and cost the government practically nothing,” he said. “A small, temporary program can have a huge impact. It’s an idea whose time has come.” 

Foreclosure Actions 

The other way to stabilize prices is to finally get a handle on foreclosures, which exert heavy downward pressure on prices. Donovan said the administration is making gains in this effort with the voluntary cooperation of 14 of the country’s largest mortgage servicers, representing 75 percent of the market. 

But several panelists said the voluntary effort hasn’t proven to be effective yet, and that a new wave of foreclosures is expected this summer. 

“If modifications don’t work, we need to stop waiting for voluntary compliance,” said John Taylor, CEO of the National Community Reinvestment Coalition. “The government should buy [the loans] at fair market value, take them out of the market, modify them, and end the foreclosure crisis.”

The big worry about federal intervention among several panelists is the apparent lack of an exit strategy. It tends to be far easier for the government to get involved in the market, through interventions like the giant federal bank rescue plan, than it is to get back out. 

“Right now the Federal Reserve is the mortgage-backed securities market,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association. “I don’t know the exit strategy and how long this can continue. It’s scaring off other investors. If the Fed stops buying, [what happens?] How do we get out of it?”

Don't Skimp on Mortgage Modifications

Martin Feldstein, the noted deficit hawk who chaired the Council of Economic Advisors for President Ronald Reagan, said mortgage modifications are one area where the administration shouldn’t skimp, even at the cost of growing the federal deficit, so he was disappointed that the administration is balking at the cost of that. 

Referring to comments made by HUD Secretary Donovan, he said, “I’m disappointed the HUD secretary said it’s too expensive for the government to deal with negative equity mortgages…. We still have not dealt with the overhang of underwater mortgages.”

Even without further federal intervention the housing market will turn around, the panelists agreed. 

The unknowns are how long recovery will take, how much damage will be done to the economy, and how strong the recovery will be.

The Shape of Things to Come

When the recovery does take hold, the housing market will be very different from what it was before, panelists said. The boom years of 2002–2007 were fueled not by income growth but by debt. After what’s been learned from that debacle, any future growth will have to be based on income growth, said Sarah Rosen Wartell, executive vice president of the Center for American Progress. Such growth will likely be far more moderate, but also more sustainable. 

Wartell said the Obama administration was right to focus both on short-term stimulus and investment in clean energy, education, and healthcare reform, because those are the kinds of investments that can lead to the long-term income growth.

—Robert Freedman, REALTOR® Magazine