U .S. home prices are set to fall further. There is nothing policymakers can do to forestall this, but there are things they can do to mitigate the severity of the decline. With Europe in disarray, the supercommittee struggling to reduce the federal deficit and a payroll tax increase looming next year, help for the housing industry could make the difference between a continued economic recovery and a double-dip recession.
House prices are currently being driven by distressed home sales — foreclosure and short sales. About a third of home sales nationwide involve distressed properties, an astounding figure. In the busted housing markets of Arizona, California, Florida and Nevada, the share is well over half. Distressed properties are often vacant and in disrepair, and thus sold at significant discounts. As the share of distressed sales grows, home prices fall.
House prices have been more stable in recent months, largely because legal and regulatory issues have slowed foreclosures and thus limited the number of distressed sales. A major impediment has been the state attorney generals’ lawsuit against the mortgage companies over the robo-signing fiasco and other foreclosure process problems. Once this suit is settled, the foreclosure machine will gear up again, distressed sales will increase, and house prices will resume their descent. Prices have already fallen by a third since the housing crash began six years ago.
Falling home prices pose a serious threat to the economic recovery. A home is still the biggest asset that most Americans own. Small-business owners use their homes as collateral for loans to finance investment and hiring. Local governments rely on property tax revenue, which is tied to real estate values, to fund schools and pay police officers and firefighters. As home prices fall, moreover, more homeowners find that they owe more than their properties are worth, setting the stage for more foreclosures and more price declines. This vicious cycle, which raged during the Great Recession, could easily resume.
Given the current political and fiscal realities, there is no silver policy bullet that will avoid all this, but policymakers can take several smaller steps that will make a meaningful difference.
Allow for higher conforming loan limits for another year. The conforming limit determines the maximum loan that Fannie Mae, Freddie Mac and the Federal Housing Administration are permitted to insure. When private mortgage lending collapsed during the recession, these limits were increased temporarily to allow the federal agencies to step into the breach.
The higher limits expired in October. It’s too early to gauge the fallout, but there is some evidence that the change has hurt. Despite lower mortgage rates, applications for home purchase loans have weakened since the summer, and the monthly flow of pending home sales — contracts signed but not yet closed — fell significantly in September. Higher loan limits help housing in the Northeast, in Florida and on the West Coast. Allowing the conforming loan limits to decline is necessary, eventually, to ease the government out of its role as the nation’s mortgage lender, but now is not the time, while the housing market and the economy are still in trouble.
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