Solutions to the nation's housing bubble still up in the air
Homes are still overpriced by $8 trillion. Is 'tough love' the answer?
So far, President-elect Barack Obama has not said exactly what he wants to do about the nation's housing market bust.Skip to next paragraph
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Economist Joseph Gyourko sympathizes with Mr. Obama's reluctance to spell out a solution. "You look at the size of the problem and it takes your breath away," says the professor of real estate and finance at the Wharton School, University of Pennsylvania, Philadelphia.
The United States has some 80 million houses. Owners of about 10 percent of them are in some sort of financial distress. With the economy still tumbling, the number of endangered home owners might rise to 10 million, Mr. Gyourko predicts.
Maybe by late January or February, Obama will have put together a proposed remedy for the multitrillion dollar housing crisis, he suspects.
The basic problem is that the housing price bubble that inflated over recent decades has popped and continues to deflate. As a whole, American homes are still overpriced by $8 trillion, calculates Dean Baker, codirector of the Center for Economic and Policy Research in Washington. He wants that bubble to deflate faster in parts of the country where too many houses have been built.
In bubble markets, Mr. Baker argues, the supply of housing hugely exceeds demand at current prices. The way to restore stability is to have prices return to levels consistent with demand conditions. Propping up prices now in bubble-inflated markets, primarily those on the West Coast, Florida, and the East Coast north of Washington, D.C., would just pass along housing losses to a new contingent of home buyers down the road when the economy rises and interest rates rise again, he holds.
Both Baker and Gyourko disapprove of a reported Treasury Department plan to revitalize the housing market by using the financial might of Fannie Mae and Freddie Mac, now essentially government owned, to encourage banks to issue traditional, 30-year fixed-rate mortgages at interest rates as low as 4.5 percent. That plan could be "very expensive" for the government – perhaps $7 billion to $15 billion in losses – if the recession deepens and more people lose their jobs and default on their mortgages, says Gyourko. Those losses would eventually fall on taxpayers.