Seeking Solutions to America's Housing Crisis

The Obama Administration has put forth its plan to help struggling homeowners. The foreclosure relief package unveiled last month would allocate $75 billion from the $700 bailout bill to help lenders lower borrowers’ mortgage payments. The plan comes as home sales continue to plummet, prices continue to deflate, and inventories continue to grow. Nicolas Retsinas, director of the Joint Center for Housing Studies, provides perspective on the nation’s housing crisis.

1. What is your assessment of the president’s plan?

I think the plan is balanced and innovative. At the same time one should not overestimate the impact of the plan on the most serious housing crisis this country has faced since the Great Depression.

The plan attacks the root of the problem in our economy which is the depressed housing market. This would have been a much better plan had it been put into place a year ago. It does however balance the appropriate role of the government in guiding, motivating and rewarding the private sector to make the right decisions to keep responsible borrowers in their homes. It replaces a flawed policy where government was at worst a spectator, at best a cheerleader, in encouraging loan modifications. This plan gives the government a seat at the table.

2. Will the plan assist only those homeowners who are currently in trouble, or could it also help those facing financial challenges in the future?

The plan has several components. One part enables homeowners who are current on their mortgage today to refinance and take advantage of lower interest rates. This makes it less likely that they would become delinquent and default on their mortgage in the future and has the added benefit of providing more income for families that they could spend to help bolster our economy.

The other part of the plan, the interest rate subsidy portion, is more directly aimed at borrowers who are having trouble today. In this part of the plan, the government allocates subsidy dollars to make mortgages more affordable. It is predicated on the premise that the borrower will pay their mortgage if they can afford to pay their mortgage, even if they owed more than the house is worth.

3. What other moves could/should be made to help stabilize the housing market?

The most important factor in the housing market is the state of the economy, and in particular, whether people are working. This plan can only succeed if the government stimulus package puts people back to work and stops the widespread job losses we have seen in recent months. In many ways, the housing recovery plan is only a part of the solution. The other part is the intervention in the broader economy.

Again, while I am supportive of the plan, one of the missing ingredients was a way to actively simulate demand. This is a difficult challenge given the state of the economy, but one that I think has to be addressed.

4. Is this a good time for savvy buyers to enter the market? How long in your estimation before the housing market rebounds?

That depends. Certainly prices are as low as they have been in most markets for the last five or six years. I think a key question a prospective buyer must address is whether or not they are buying a home they intend to live in for an extended period of time. If they are buying a home primarily for investment purposes, this is a very risky market to participate in.

When the market will rebound will in large measure be a function of when the economy rebounds. So to the extent that we are able to put people back to work and are able to stop the job losses, and if this housing recovery plan begins to slow down the number of foreclosures, the housing market will recover. In those markets where there has not been substantial overbuilding, in the northeast for example, it is plausible (subject to an overall economic recovery) that the bottom could be reached at the end of this year or sometime next year. In those markets like the southwest and south Florida, where there was extensive overbuilding, the recovery will be substantially delayed.

Retsinas was interviewed on February 26, 2009.