Nicolas Retsinas on the State of the Nation's Housing

The current U.S. economic downturn is already one of the worst since the Great Depression, and the housing market contraction is not over yet, according to the 2009 State of the Nation’s Housing report from the Joint Center for Housing Studies (JCHS) at Harvard Kennedy School and the Harvard Graduate School of Design. But Nicolas Retsinas, director of the JCHS, sees a glimmer of hope in the new report.

Q: In today’s U.S. housing market, we’re overbuilt and banks aren’t lending. But there are signs that the recession has hit bottom, and may soon recede. What does that portend for the housing market?

Retsinas: There are signs that the market has hit bottom, but the signs are not totally persuasive. Let’s put this in context. The housing market is suffering its worst downturn not only in this generation, but several generations. And while sales and starts have stabilized, we’re still faced with rising numbers of foreclosures. So the short term prospect is not particularly positive, but there are signs there might be some promise on the horizon.

Q. What hurdles are aspiring first time home-buyers facing?

Retsinas: There are two. One is tightened credit standards. We have over-lent in the past. Borrowers have over-borrowed. And as a reaction to that, lenders are making it increasingly difficult to borrow. Down payment requirements have increased substantially. Higher credit scores are now necessary. For first-time homebuyers struggling to make do, those can be insurmountable barriers. You couple that with nervousness about whether they might lose their jobs, and that will make them very cautious about being a homebuyer.

Q. When the dust settles, how will the mortgage industry be changed?

Retsinas: I think the market has already changed dramatically. For example, in the first quarter of 2009, almost 95 percent of all residential mortgages were purchased, guaranteed, insured, securitized by the federal government. Indeed, it is the federal government that is supporting our mortgage market. You couple that with incredible consolidation in the banking industry. Again, in the first quarter of this year, the top five lenders originated over 70 percent of all residential mortgages. The challenge will be, once the economy does recover, what will the market look like, and what will the role of government be?

Q. How are the Obama administration’s policies affecting the U.S. housing market?

Retsinas: The policies put forward by President Obama — particularly the loan modification policy — I felt were ingenious, and had the promise of stopping the rise of foreclosures. Unfortunately the problem has changed since those programs were announced.

When those programs were announced at the beginning of the year, the greatest worry was the terms of the mortgage themselves — the “toxic” terms that included increases in interest rates, interests in repayment schedules. But today the problem is loss of jobs. And these programs, while they can help modify the mortgages, probably do very little to help those who’ve lost their jobs.

Q: What do you consider the major findings in this year’s State of the Nation’s Housing report?

Retsinas: The major news coming out of the report this year is housing continues to be under substantial stress or duress. While there are some signs of recovery – the inventory is falling and mortgage rates have been low – it is hard for those signs to overcome the headwind of a faltering economy, the headwind of an increasing number of foreclosures. And that’s going to be the battle, that’s going to be the tug of war in the days ahead – those signs of recovery, can they overcome the larger economic problems that face this nation?

Q. Are there some positives to be found in this year’s State of the Nation’s Housing Report?

Retsinas: Yes, there are. Home prices have become affordable once again. If you are working, if you do have good credit, if you can assemble an aggregated down payment, there are some pretty remarkable bargains to be had. Indeed, in many markets for the first time, owning is less expensive than renting. You couple that with the long-term demographic projections. We continue to add households. While immigration has slowed, people are still coming come to this country. The “echo-boomers” are a larger cohort than the “baby-boomers.”

So over the long run, the housing market will be supported by this fundamental notion that people will need a place to live. That will fuel the long-term recovery of the housing market.

Q: This year’s report has some interesting findings regarding immigration. Please elaborate.

Retsinas: Immigration has slowed dramatically. It is proof positive of the adage that people emigrate to a country for economic opportunity. As our economy has faltered, so too has immigration slowed; indeed there is even evidence of reverse immigration. But overall the immigrants who moved here over the past decade will form an important component of home buying going forward. They entered this country at a young age and are now entering home buying age. If we can solve the problems in the mortgage market, and if we can stabilize housing prices, these immigrants from yesterday will become the home buyers of tomorrow.

Q. Are there any other significant findings in this year’s report that you’d like to mention?

Retsinas: The other headline from this year’s report that I think has been put on the sideline, but really deserves to be a headline, is the increasing problems of affordability.

When one reads in the newspaper about falling house prices, one might suspect, “well everyone can now afford a home.” The reality is that an increasing number of people, an increasing number of households, are paying a significant share of their income for housing. We found in this years’ report that over the last five or six years, three million more households pay over 50 percent of their income for housing. That is an extraordinary number of people who are struggling to make do, and if they’re paying that much for housing they’re having a hard time putting food on the table, they’re having a hard time buying clothes for children, they’re having a hard time paying health care costs. So that’s in the shadows, but a shadow that makes it very difficult for many people to make do.

Interviewed by Molly Lanzarotta on June 12, 2009

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Nicolas Retsinas

Nicolas Retsinas