It’s clear that it will be hard to start growing the economy and lowering unemployment until we address the crash in the housing market. The tricky part will be doing it right, so we don’t again sow the seeds for yet another disaster.
We’ve had a series of booms and busts in housing in recent decades. Back when Governing began publishing in the late 1980s, the economy was suffering from a serious financial crisis in housing finance as savings and loans around the country -- many owned or controlled by developers -- went belly-up.
Today’s situation is far worse. State regulators shared blame with their federal brethren in the savings and loans mess. But the feds hog the limelight on this one. It’s not only that federal agencies looked the other way while the financial industry engaged in what was both legally and morally criminal behavior in bundling and selling toxic packages of bad mortgages. It’s that in 2005, the George W. Bush administration’s comptroller of the currency, who oversees the national banking industry, pre-empted a number of states (led by Georgia) from trying to prevent their banks from givng mortgages to people who could not afford them. (The irony now is that banks will hardly give a loan to anyone.)
Regulation is only a part of the picture. Federal policy for six decades has promoted homeownership: providing home mortgages and allowing deductions for mortgage interest, property taxes and capital gains on home sales. It is a policy designed to promote home-ownership, and it has been successful. Only a couple of years ago, more than two-thirds of Americans lived in their own homes.
That’s probably a commendable goal socially, but economically there is growing doubt that granting housing such priority status makes sense. It not only has played a key role in our roller-coaster economic performance, but it also has helped create the mirage of a phony prosperity that would not last and had little to do with underlying economic health, not to mention the distortions in our infrastructure investment, employment trends and land use.
As a percentage of the overall economy, the housing sector peaked at a bit more than 6 percent in 2006. It is now 2.4 percent. That’s a huge hit for the economy and the job market, especially when you figure that housing is an industry that cannot be outsourced to China (aside from some toxic drywall). Nationally, new housing starts have fallen from about 2 million in 2006 to a current annual rate of around 600,000, a drop of about 70 percent. In states dependent on housing to lead economic development like Arizona, Florida and Nevada, it has been worse, with starts down by 85 percent.
According to Harvard University’s Joint Center for Housing Studies, pressure from another wave of home foreclosures caused home prices to double-dip earlier this year, in a drop that economists figure has surpassed the one during the Great Depression. Now they are worried about even worse numbers because state and federal regulators have worked out a settlement with big banks over their shoddy paperwork covering some 2.2 million homes in foreclosure -- so another wave may be coming.
What to do? While we want to coax the sector back to health, we also want government to step back from being a booster. The goal for federal, state and local governments should be to help revive housing, but nudge it in a different direction.
There are immediate impediments, because debt reduction now defines most of what Washington does or doesn’t do. So though reviving housing might be enormously beneficial to increasing jobs, it doesn’t fit with existing and prospective plans to lessen government involvement. For instance, a new rule issued a month ago reduced the ceiling on mortgages the federal government would insure from $729,750 to $625,000 in wealthier counties. In others, where housing prices are lower, the new limits would be reduced. The result, of course, is to depress sales at the higher end of the market.
Second, though this is more prospective, one of the key ingredients of any grand budget compromise, if there is one, probably will be a rewrite of the tax code allowing rates to fall broadly by eliminating deductions. The most obvious would be the one for home mortgage interest, either eliminating it completely or retaining it with a lower cap (the current maximum is $1 million) as well as for second homes.
The good news is that it’s possible the stage is being set for eventual recovery because housing is becoming more affordable. Last year, the number of households able to afford the payments on a median-priced home at the recommended 28 percent of income soared from 48 million to almost 72 million. The monthly payments required to support that mortgage have dropped by more than one-third. (Though particularly among renters, income has been dropping as well.)
A housing recovery based on solid economics rather than public-sector pump-priming hopefully will allow the industry to embrace a more sustainable future, one where development turns back toward the center of metro areas rather than sprawling further out, where good design and environmentally smart construction trumps the slap-dash faux mansions that have destroyed much of our open spaces, and one where we are not so dependent on the overuse of automobiles.
Long term, that would serve the interests both of the economy and the industry.