Building up Housing – How to Fix the Economy

SUSIE GHARIB: More grim news today on the housing market. Builders broke ground on fewer homes in the month of July. Housing starts fell 1.5 percent. And building permits, a gauge of future construction, fell 3.2 percent. Both numbers were worse than expected and a sign that the real estate market is still weak.

Now, that’s bad news for the U.S. economy, which benefits from home construction. As we continue our series, “How to Fix the Economy,” we focus tonight on housing. Darren Gersh explains the issues.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: There’s no place like home to jump start the economy. Usually housing leads the way out of recession, creating construction jobs and every other job tied to a home, from furniture-making to finance. But housing is a long way from a leadership role now.

JED SMITH, QUANTITATIVE RESEARCHER, NATIONAL ASSOCIATION OF REALTORS: We would normally expect to see sales maybe 400,000, 500,000 higher. We’d expect to see prices higher. What we are doing is we are pulling out of a rather significant slump very slowly, much more slowly than would normally be the case.

GERSH: The key stats tell the rest of the story. Home prices are down 32 percent from their peak in 2006. The total inventory of homes for sale, including the shadow inventory of homes in or near foreclosure, is 5.7 million, down from the peak, but that will still take years to clear.

SMITH: When foreclosures start to ramp down to what they should be, which is well under 5 percent, I think you’ll see prices start to really stabilize and start to recover.

GERSH: So far, efforts to modify mortgages and help clear the backlog have done little to help. The Obama administration’s Home Affordable Modification Program has helped 657,000 homeowners renegotiate their loans; 1.5 million people have signed up for the foreclosure prevention program, but, so far, almost half of them have dropped out.

Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.

Economist Mark Zandi Offers Ideas to Fix the Housing Market

Susie Gharib, NBR Anchor/Senior Strategic Advisor

GHARIB: So what are the solutions to fixing the housing mess? Here with some ideas: Mark Zandi. He`s the chief economist of Moody`s (NYSE: MCO) Analytics.

Hi, Mark. Nice to have you on the program.


GHARIB: Well, let`s begin by talking about President Obama`s latest housing proposal, which lets the private investors buy a pool of foreclosed homes, then they rent them out and eventually flip them. What do you think of that plan? Will that help the housing market at all?

ZANDI: Yes, I think it`s reasonably good idea. You know, the key here is reducing the number of distressed properties, the number of properties that are in foreclosure or pretty close to foreclosure. That`s key to stabilizing housing values and getting housing construction going.

And so this is an effort to take properties that Fannie Mae, Freddie Mac, and the FHA have repossessed. And instead of dumping them on the market, which would lower housing values and make construction markets weaker, turning them into rental properties.

And they have got a number of different mechanisms for doing it. There is no magic bullet here. And I don`t think this is a magic bullet, but I think it will be helpful.

GHARIB: And how would it help the economy?

ZANDI: Well, anything that can stabilize housing values, house prices, and help to support an increase in housing construction is a big plus for the economy. As we just heard, the housing downdraft, the collapse in the housing markets has been perhaps arguably the most significant weight on the economy.

So as that lifts, that will be a nice support to economic activity.

GHARIB: Now one thing that you`ve been talking about in many of your reports is getting policy-makers to make it easier for mortgage refinancings, and also delaying a reduction of the so-called conforming loan limits. Tell us about these two ideas and why they would help.

ZANDI: Right. I think one of the things that could really help very quickly is to help facilitate more mortgage refinancings. Many home-owners are having difficulty taking advantage of the currently very low mortgage rates. As you know, fixed mortgage rates are at record lows.

If you`re a prime borrower, you can get a fixed-mortgage loan for 4.25 percent. That`s very low. But most people can`t do that because they may have an impaired credit score or they don`t have any equity in their home.

So I think there are ways to bring down the rates that those folks face, particularly if those are loans that are already insured or owned by Fannie Mae and Freddie Mac. Reducing those rates will allow for more refinancings.

That lowers monthly mortgage payments and makes it less likely that those folks would get into trouble. And it would also put money in their pockets that they would be able to spend. And that would be a big plus for the economy.

GHARIB: Mm-hmm. Now some people have been suggesting reviving the first-time — the credit for the first-time home-buyers. What do you think of that idea?

ZANDI: I think that`s an idea whose time has passed. You know, we`ve had three housing tax credits. I think the first couple of rounds were pretty helpful. They brought an end to the housing crash.

But I think homeowners are getting to the point — or potential home- buyers are getting to the point where they`ll stop buying and wait for next housing tax credit, so it`s becoming counterproductive. And if you talk to the folks in the real estate industry, they are not very supportive of that idea.

GHARIB: You know, Mark, a big part of the whole problem that we`re talking — I mean, these proposals all sound good, but a big part of the problem is this crisis of confidence. What do you think has to happen to restore consumer confidence so they feel good about buying a home?

ZANDI: Well, the key here is I think that policy-makers need to remain aggressive in responding to the problems that we face. The administration, Congress has to follow through on the debt ceiling deal and continue on with deficit reduction.

The Federal Reserve has to be — remain very aggressive in keeping long-term interest rates down. And European policy-makers have to be aggressive in responding to their crisis.

So the crisis of confidence will only be resolved if policy-makers remain consistent and aggressive in responding to it.

GHARIB: And that`s a tall order, right? Thank you so much, Mark.

ZANDI: Thank you.

GHARIB: We`ve been speaking with Mark Zandi, chief economist of Moody`s (NYSE: MCO) Analytics.

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