If the U.S. economy were a neighborhood, the housing market would be the Boo Radleys: the one weird neighbor who doesn’t mow his lawn, lets his house fall to pieces and generally drives down resale values for the whole street.
Put another way, the slumping housing market is serving as a drag on the broader American economy as it struggles to recover the effects of the Great Recession. Further evidence came Tuesday from the National Realtors Association, whose monthly data showed sales of existing homes fell by 3.8 percent in May. This puts the projected annual total for 2011 at just over 4.8 million – a figure that lags behind even last year’s dismal showing. And last year was the worst in thirteen years.
“All the programs – going back to the ones that [President George W.] Bush instituted and the ones that [President] Obama has instituted – have turned out to be [unable] to do anything to raise the state of the housing market,” said Martin Baily, a senior research fellow at the Brookings Institution and former top adviser to President Clinton. “What will help consumers is if prices stopped falling and started rising; that would be the one that would help everybody.”
To that end, Baily told Fox News, he advocates that the Obama administration provide “temporary support” to those homeowners who are in danger of seeing their homes go “underwater.” This refers to homeowners whose debt on a given home exceeds the amount the home is worth. “That’s the kind of thing that would help the housing market stabilize,” Baily said, “so that we could turn around and get more confidence in it.”
But the central problem in the housing market is one of supply and demand. There are too many homes available for sale and not enough people who want to buy them. This excess in inventory, conservative economists argue, would be better addressed not by a sudden increase in home prices, whether accomplished by natural forces or federal action, but by a bottoming out of the market once and for all.
“I think that the reason why a lot of sellers are not necessarily willing to lower their prices is that they’re actually expecting to see whether the government, once again, is going to step in and do something to prop up these prices,” said Veronique de Rugy, a scholar at the George Mason University’s Mercatus Center. “A signal that would be extremely important for government to send to everyone ... is to say the government is not going to interfere in the housing market anymore.”
These divergent prescriptions suggest that – as with so many spheres of the U.S. economy – the proposed solutions turn on one’s view of the efficacy of government intervention. There is evidence, too, that both major U.S. political parties bear some of the blame for the current condition of the housing market.
Citizens with long memories will recall a speech President Bush delivered to a predominantly African-American audience at a church in Atlanta back on June 17, 2002. The president stood before a giant backdrop of a pre-frabricated house, which was festooned with the words “A Home of Your Own” all over it.
“Right here in America, if you own your own home, you're realizing the American Dream,” Bush said, as he vowed to increase minority rates of homeownership. His initiative followed on similar efforts by his predecessor, President Clinton.
Yet it was, by all accounts, the expansion of mortgage lending to low-income borrowers – who tend to present a greater risk of foreclosure – that burst the housing bubble of the last decade and triggered the ensuing credit crisis.
“As someone who lived in apartments, you know, most of his life, I have never understood why there's some sort of right to live in a house,” said Thomas Sowell, the conservative economist who is a senior fellow at the Hoover Institution and one of the country’s most prominent African-American intellectuals.
Sowell, like de Rugy, argued against further federal intervention to drive up the amounts that home purchasers would pay sellers. “Their whole point [in the Obama administration] is to keep housing prices up, which is so ironic, because all this started with a drive to get affordable housing,” Sowell told Fox News. “I don't know what affordable housing means, other than housing that's cheaper than the housing that we have now.”
The Obama administration has in fact proposed dramatic changes to federal housing policy, starting with the planned phase-out of quasi-public mortgage giants Fannie Mae and Freddie Mac. But the administration intends to continue making some levels of federal financing available to low-income borrowers.
To help those homeowners bracing to go “underwater,” the administration launched an initiative in 2009. The loan modification program has led to permanent adjustments for 700,000 loans – but that is far fewer than analysts hoped for two years ago.
This is the latest piece in Fox News' series "10 Ways to Fix the Economy."