 | | Kip Beckman
Principal Research Associate,
Economic Services |
The numbers are staggering. Three years after the housing crisis, 14.6 of the 51 million mortgages in the United States are underwater, meaning that mortgage debt is greater than the value of their homes. National home prices have tumbled by around 40 per cent from their highs five years ago and wiped out $7.1 trillion worth of housing wealth. In fact, the drop in home prices has been even worse than the decline that took place during the Great Depression.
The ongoing housing crisis is one of the main factors behind our view that, while the US economy will avoid slipping back into recession, growth will be very tepid over the near term. The huge number of underwater homeowners impacts the economy in many ways. First, people who have lost their jobs can’t simply pack up and leave for opportunities in other parts of the country because they are stuck in their homes. This lack of mobility is an important reason why the unemployment rate remains stuck above 9 per cent. Also, distressed borrowers spend a high portion of their income on servicing their debt, which leaves less money left over to spend on other goods and services.
To put some life back into the moribund housing market, the President recently unveiled a plan to revamp the government’s Home Affordable Refinance Program (HARP) to permit borrowers, whose mortgages are backed by Fannie Mae and Freddie Mac, to refinance regardless of how far their homes’ values have dropped. This new plan eliminates the previous rule that the mortgage had to be 105 per cent or less of the home’s value. While this change to the HARP is a step in the right direction, more will have to be done to solve the problem because many homeowners still don’t qualify for the refinancing program. Underwater homeowners whose mortgages aren’t backed by Fannie and Freddie are ineligible and, it is worth noting that, to date, less than 4 per cent of the country’s underwater mortgages have taken advantage of the HARP.
It is for this reason that more radical solutions to the housing crisis have been proposed because more conventional approaches, like refinancing mortgages at lower rates, simply haven’t done the job. In fact, some non-conventional plans, including the demolition of existing properties, have already been tried in some parts of the country.
In 2009, Ohio passed a law that led to the creation of a land bank that purchases foreclosed properties for either rehabilitation or demolition. If the property is destroyed, the land is subsequently turned over to the community to be used for community gardens. There are around 15,000 vacant properties in Cleveland, for instance, with more coming onto the market each day as the never-ending foreclosure crisis continues. Foreclosures not only lower the price of nearby homes but also discourage potential home buyers and attract crime. The hope is that the demolition of foreclosed properties should increase competition for the remaining homes in the neighbourhood and drive up prices, thereby making it easier for homeowners to refinance. The land bank in Ohio has taken over more than 1,000 properties since 2008 and has demolished 360 of them since 2010. The state’s bulldozers are on the job almost every day.
Another non-conventional option to help ease the housing crisis is to consider renting out the huge number of foreclosed properties on the market. With rents on the rise in many US states, some private investors are interested in making money by gaining access to the numerous unsold Fannie and Freddie properties currently on the market. Possible options include permitting outside investors to purchase unsold, foreclosed homes. They could then repair them and rent the home out, possibly to former owners. By lowering the number of homes for sale on the market, these rental programs could help neighbourhoods that are currently dealing with a huge number of foreclosed properties. Home prices might then stabilize and possibly increase.
Programs to encourage renting instead of owning homes are long overdue according to Yale’s housing expert Robert Shiller. He contends that the housing crisis represents a good opportunity for America to re-think homeownership. Shiller believes that the value of home ownership has been unwisely placed on a pedestal considering that, historically, it has been a bad investment compared with investing in stocks and bonds. Home ownership programs also costs the government over $100 billion a year in subsidies (mortgage-interest and property tax deductions) at a time of plus trillion dollar deficits.
It will take these “thinking-outside-of-the-box” ideas such as demolition and renting foreclosed properties to solve the housing mess in the United States. The US economy will not fully recover from the doldrums until the foreclosure problems have been dealt with and home prices stabilize and start to increase again. This development would increase consumer confidence and wealth and provide the economy with a vital shot in the arm.
References
M. Calabresi and S. Gandel, Four Ways to Fix the Housing Problem, Time, (September, 2011).