“Does this $26 billion deal move the needle on the struggling U.S. housing market at all?” This was the question asked by Ali Velshi to HUD Secretary Shaun Donovan last week in an interview last week on CNN. He was referring to the huge mortgage servicing settlement signed between the states, feds, and top five mortgage servicers announced February 9. Donovan gave a very political answer, yes it moves the needle, but there are challenges that remain.
That is barely true, as there is almost nothing in the settlement that moves the housing market towards recovery. But what was more interesting is what Donovan suggested we should do to keep the momentum going towards shifting the needle further. Donovan suggests we refinance every underwater mortgage in America and save homeowners an average of $3,000 a year and pay construction workers to rebuild vacant homes.
Huh?
The biggest problem plaguing the housing market right now is that prices are not at their bottom, household debt has not been deleveraged, and the foreclosure process is jammed up. Let prices fall to their natural bottom and people will buy the vacant homes and pay to fix them up themselves—taxpayers don’t need to foot the bill to keep the price of that home unaffordable. Meanwhile, since you have to be current on your mortgage payments to refinance, doing a forcible nationwide refinance program isn’t going to prevent borrowers who have fallen behind because they can’t afford their current payments avoid foreclosure.
Velshi, recognizing this argument puts it to Donovan, asking why we should not just let the housing market fall to the bottom. Donovan spins the answer:
From an economic view most people look at the market say house prices are where they should be at equilibrium, it’s what folks can afford. Folks who are saying let it hit bottom, the real consequences of that to families and neighborhoods are enormous. A home is the single biggest investment that a family makes. It is how they often send kids to colleges through the equity in their home, they start businesses. It’s like saying if somebody’s house is burning down we should just let nature take its courses even if it might make the entire neighborhood go up in flames. I and the president don’t believe that we should let families and neighborhoods bear the brunt of this crisis like that. We are going to keep fighting, taking additional steps like this settlement to make sure the encouraging signs in the economy continue.
Okay, four things. Well, five. Pretty much every sentence in there is wrong. It is stunning—especially for someone who is supposed to be the top adviser on housing for the president.
First, housing prices are not where they should be or at what people can afford today. If they were, then we wouldn’t have 3 million homes on the market and another 7 million or so in the shadow inventory. Sure, price-to-rent ratios are down to rates last seen in the 1990s. And real housing prices are about where they should be given the historical norms of growth for inflation adjusted housing prices. But every burst housing bubble since WWII has seen real prices fall below the trendline for several years before bouncing back to equilibrium—and there is no reason to think this price decline will be different.
Second, yes, foreclosures suck. And lower housing prices will mean more underwater debt. But the consequences of dragging the housing collapse out for five years and counting, when we could have been in recovery last year are also “enormous.”
Third, and this is nothing new on this blog: Homes. Are. Not. Investments. Or at least, they are not good investments. They are savings accounts at best.
Fourth, using home equity to pay for tuition is an admirable story, but turning homes from a retirement nest egg into an ATM is one of the things that got us into this mess.
And fifth, letting housing prices fall to where they are affordable is not like saying “let the house burn down.” It is more saying that we should not keep adding support beams to keep a crumbling home that was built on a faulty foundation from collapsing because it is always going to be unstable. It would cost less in the long run to just build a better house.