More Stimulus for Housing?
August 30, 2010 2:12 PM
On August 29, Shaun Donovan, Secretary of Housing and Urban Development, said that the housing market's July was "worse than expected" and that the Administration may support a new homebuyer tax credit. His statement follows similar recent expressions of concern about the overall economy from other senior Obama Administration figures. They too made it clear that the Administration will step in with other economic stimulus measures to rescue a faltering U.S. economy if necessary. With continued signs of a possible double dip recession, among them the recent housing construction and resale data, the first question is whether additional economic stimulus is necessary. If the answer to the that is yes, then the next question is whether put the stimulus resources into housing, and if so in what form.
With U.S. unemployment stuck around 10%, a further erosion of the economy could be devastating. On the other hand, the bailout and stimulus funding approved by Congress at the request of Presidents Bush and Obama in recent years has resulted in a dramatic federal deficit increase that itself is posing a growing risk to the nation's long term economic stability. In fairness, those steps may have prevented an economic depression, but the net result is that we face a policy dilemma.
With U.S. unemployment stuck around 10%, a further erosion of the economy could be devastating. On the other hand, the bailout and stimulus funding approved by Congress at the request of Presidents Bush and Obama in recent years has resulted in a dramatic federal deficit increase that itself is posing a growing risk to the nation's long term economic stability. In fairness, those steps may have prevented an economic depression, but the net result is that we face a policy dilemma.
Our view is that we should hold off additional stimulus for another
couple months to see what happens. While most housing data remains
bleak, there are a few (precious few) good signs, including recent
stability in home selling prices in just about every market. That said,
mortgage lenders are facing a growing inventory of foreclosed homes,
since their participation in the HAMP program has been limited despite
government incentives provided them to refinance the mortgages of
distressed homeowners. The challenge is made worse by the growing
numbers of deeply underwater homeowners who are simply leaving their
homes and mailing the house keys back to the lenders. At some point
mortgage lenders may have no choice but to have a fire sale on their
growing inventory. If a large share of foreclosed homes went on the
market around the same time, it could cause a crash in home values that
would seriously undermine the lifetime of home equity savings of
millions of homeowners and threaten the entire economy.
Clearly Congress and the Administration would need to anticipate such a threat and act in time to prevent it from happening. Whether a buyer tax credit is the best tool to stabilize the market is the next question. It might be more efficient for the government to simply buy the mortgages from lenders at distressed prices, then lease the homes back to any current owners that could still afford market priced rents, with a buyback option at the government's cost. If the government gets the properties cheap enough, market rents may then cover the government's cost of borrowing the money. Homeowners would not have to leave their homes and could buy them back when they got back on their feet. This will be a very difficult judgment call, and President Obama, his housing/economic team, as well as Congress, need to keep a sharp eye on the economy over the coming months and remain prepared to act quickly and decisively if they see signs of more rapid and serious economic deterioration.
Clearly Congress and the Administration would need to anticipate such a threat and act in time to prevent it from happening. Whether a buyer tax credit is the best tool to stabilize the market is the next question. It might be more efficient for the government to simply buy the mortgages from lenders at distressed prices, then lease the homes back to any current owners that could still afford market priced rents, with a buyback option at the government's cost. If the government gets the properties cheap enough, market rents may then cover the government's cost of borrowing the money. Homeowners would not have to leave their homes and could buy them back when they got back on their feet. This will be a very difficult judgment call, and President Obama, his housing/economic team, as well as Congress, need to keep a sharp eye on the economy over the coming months and remain prepared to act quickly and decisively if they see signs of more rapid and serious economic deterioration.
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