In Housing Trouble, The Seeds For Recovery

There was not a bit of good news in the S&P/Case-Shiller data about the housing market for the last quarter of 2010. The National Index was down 4.1% from the same period last year. Many markets reached lows which matched home prices in 2000. The trouble in cities which include Las Vegas, Detroit, and Cleveland was  particularly bad. But, almost no city has escaped the powerful down draft.

The seeds of a recovery are probably buried in the data and the trends they represent. The federal government now has to deal with the fact that housing has already hit a double dip. This combined with intractably high unemployment could cause the improvement in the US economy to sputter. The idea that a recovery can be jobless has already been questioned. A “homeless” recovery may be an even greater challenge.

It can be conceded that the number of underwater home mortgages, now measured at about 11 million, and the shadow inventory of houses seized by banks, which numbers over 2 million, makes further foreclosures more likely. Some will be caused by unemployment, some will be “strategic” defaults, a problem which is vexing in states like Florida where many second homes are located. Another problem is that the real estate buyer’s strike has not let up despite low interest rates. Shoppers are concerned that prices will go even lower, which will wipe out any equity in a newly purchased home.

Washington views all the housing trouble from the sidelines now, but Congress and the Administration are forced to look back at tax credits which ended last April. The credits cost the government money, but they gave the market some level of equilibrium. That has dissolved over the last year.

The federal government will get the chance to revisit the housing problem as it debates the budget. Some politicians know that nothing a greater threat to the economy than the disintegration of home prices. The situation damages everything from consumer confidence to bank losses. And, not a single national solution is in place.

One of the arguments against aiding the housing market is that the president’s Home Affordable Modification Program was a failure. But, the plan was limited to a modest group of people about to lose their homes. There is an even larger number of people who may be hanging on, but who now live at the limit of their means to keep their homes. These people are willing to face the obligation of mortgage payments, no matter how much it hurts.

Congress will have to decide that half measures will not help create a bottom for the home market. Something like tax credits will need to be put back into place. The program was a proven success. It may not have gone far enough, but the beginning of a solution lies in a plan that worked in the past.

Douglas A. McIntyre