Three years into the president’s term, the nation’s housing market remains a mess. Although some data shows some signs of improvement in recent months, one in four homes with mortgages is underwater and homeowners are struggling to cope with the loss of $7 trillion in home equity. Meanwhile, the National Association of Home Builders calls 2011 the worst in its 69-year history when it comes to construction of new homes.
Even so, with Iowa voters set to caucus on Jan. 3, the GOP candidates are not rushing forward with alternatives, making it very likely there will be no help on the way if a Republican recaptures the White House next fall. In fact, some of the ideas proposed by Republican presidential candidates could further harm the housing industry, according to industry leaders.
Neither Obama nor the GOP candidates are talking about the kinds of expensive and, no doubt, politically risky moves some economists say are necessary to repair the housing market.
Some economists say bold moves, such as a large-scale refinancing program that would relieve mortgage holders of their negative equity, would help revive the market. Mark Vitner, a senior economist at Wells Fargo, is among those who say that such programs — including one featuring federally backed second mortgages — would give underwater homeowners the ability to sell their homes, and bring back confidence to people who are waiting for the market to improve before they buy or sell.
More than that, all the Republican candidates are advocating a smaller federal role in the housing market, which industry leaders say is the opposite of what is needed.
“So far, none of [the GOP candidates] have said what the American people want to hear — that there is a federal commitment to housing,” said Gerald M. Howard, chief executive officer of the National Association of Home Builders.
To be sure, the GOP candidates have made dramatic statements about the need to get government “out of the way” of the housing market. They say they want to get rid of Fannie Mae and Freddie Mac, the government-backed mortgage giants that together control the vast majority of the nation’s secondary mortgage market.
But Fannie and Freddie, as well as the Federal Housing Administration, have been integral to the response the government has mounted to the housing crisis. Eliminating Fannie and Freddie — which is also a stated goal of the Obama administration — is unlikely to be possible anytime soon without making the market worse, analysts say.
Obama recently loosened requirements on a federal program that would make it easier for underwater homeowners to refinance their mortgages at lower rates. That effort replaces another program that fell far short of its goals and that was not lifting the burden of negative equity from homeowners.
“The aversion to anything that looks like a bailout is the biggest impediment to getting anything done,” Vitner said. “Everybody is worried about how the tea party or the ‘Occupy’ people would view that.”
John Feehery, a Republican strategist who is not affiliated with any of the GOP candidates, added that any potential government remedies for the housing market are both complicated and expensive.
“The housing crisis is the No. 1 issue facing the economy,” he said.“But because the problem is so complex and the solutions are so expensive and so hard to explain, nobody wants to talk about it.”
Republican candidates also have been critical of the Dodd-Frank financial regulation law enacted last year. Supporters call the measure an effort to prevent the abuses that helped cause the financial crisis. But critics say the new rules bind banks in red tape, discouraging lending.
If Dodd-Frank, were repealed, “you would see the housing market start to improve overnight,” said former House speaker Newt Gingrich during a November GOP debate hosted by CNBC. “Dodd-Frank kills small banks, it kills small business. The federal regulators are anti-housing-loan, and it has maximized the pain level.”
Former Massachusetts governor Mitt Romney has said that policymakers should just allow home prices to fall far enough that people start buying again. “The best thing you can do for housing is to get the economy going, get people working again, seeing incomes, instead of going down, incomes coming up so people can afford to buy homes,” he added.
But the idea of getting the government completely out of the way frightens many in the real estate industry, because they don’t see the private sector picking up the slack, particularly for the mortgage market.
Other Republican candidates have offered similar remedies that are popular with their constituents who favor smaller government. Members of Congress and policymakers who are pushing for drastic cuts to the federal budget to reduce the deficit have also proposed eliminating or modifying the mortgage interest tax deduction, which provides taxpayers with a key incentive to own a home.
“It’s the regulatory world that is killing America,” said Texas Gov. Rick Perry. Rep. Michele Bachmann (Minn.), meanwhile, has said that Fannie and Freddie should be put “out of business. They are destroying our housing market.”
Those ideas are far different from those offered by former GOP presidential nominee Sen. John McCain (Ariz.) as the housing market was imploding in the weeks before the 2008 election. At the time, McCain proposed allowing millions of financially pressed homeowners to refinance their mortgages with government assistance.
As the McCain campaign saw it, the candidate’s idea offered a twofold benefit: It would have helped clear some of the negative equity shackling homeowners, while replacing the toxic mortgage assets poisoning bank balance sheets with loans that were being paid back.
McCain’s plan met vehement opposition before it was even fleshed out because of the “moral hazard” it presented.
“There was enormous sentiment from people who said, ‘I got a 30-year mortgage and I am not going to pay for somebody who is now in trouble,’ ” said Douglas Holtz-Eakin, who was McCain’s top economic adviser in 2008 and an architect of the nominee’s housing plan. “There seems to be no large-scale economically feasible housing intervention that is politically feasible.”
Given that, having the government reduce its role in the housing market has some appeal among conservative policymakers, he added.
Meanwhile, the struggling housing market continues to be hit from two sides, one being the people who have lost jobs and are struggling to pay their mortgages, and the other being the millions of homeowners are underwater and wondering whether their largest investment will ever regain its value.
Holtz-Eakin said that at least part of that problem could be solved if the loans were restructured in way that lightened the financial load for homeowners. But for that to work, he added, the enormous losses “would have to be socialized across 300 million Americans,” which is exactly what makes it politically impossible.
“Economically it is so benign and simple,” he said. “But politically, the problem is people don’t want to bear other people’s losses.”