General
Housing Law Seeks to Ease Many Problems, but Economic Challenges Remain
Congress passed and the President signed a law which has the broad objective of stabilizing the U.S. housing market. The law has many provisions. The key provisions are described briefly here:
- Insure up to $300 billion of new mortgages to help distressed homeowners replace unaffordable existing mortgages
- Increase limits for loans insured by FHA, Fannie Mae, and Freddie Mac
- Provide explicit government backstop for Fannie Mae and Freddie Mac
- Provide almost $4 billion of federal funds for purchase and rehabilitation of foreclosed homes in hard-hit communities
- Give some first-time homebuyers a tax credit (actually an interest-free loan)
The Federal Housing Administration (FHA) and the government-sponsored enterprises (Fannie Mae and Freddie Mac) play indispensable roles in financing U.S. housing, especially because other sources of mortgage financing have diminished greatly. The provisions of the new law that refer to those institutions seem to be worthy attempts towards housing stabilization.
Many provisions of the new law seek to prevent excessive erosion in housing prices. Federal money to help communities with high levels of foreclosure has a clear objective of preventing and repairing blight that can depress prices severely. The tax credit for first-time homebuyers tends to boost demand for purchased housing and thus supports prices.
While all provisions of the new law have caused much debate on how effective they will be, the most controversial provision seems to be government insurance for up to $300 billion of replacement mortgages for distressed homeowners. Estimates are that about 400,000 homeowners could benefit from that provision. Some statistics on the U.S. housing stock can help bring that part of the new law into perspective.
There are about 130 million housing units in the United States, and that number has been increasing at a rate of 2 million per year over the last few years, according to the U.S. Census Bureau. About 76 million units are occupied by an owner and about 36 million units by renters. The remaining 18 million units are classified as "vacant," but only about one third of those are on the market either to sell or to rent. Analysis of the changes over the past three years in the Census Bureau numbers suggests that there is an excess of about 2 million units that owners would like to sell or rent but cannot in the face of a large supply and weak demand.
Foreclosures are likely to worsen the problem of excess supply over the course of the next several months. During the summer of 2008 more than 300,000 subprime adjustable-rate mortgages are resetting to higher rates and to payment amounts that many of the borrowers won't be able to pay. According to one estimate covering the period through the end of 2009, the total number of borrowers facing loss of their homes will be 2.8 million. The part of the new housing law that may help 400,000 homeowners is too limited to slow the downward housing spiral.
The housing market is closely tied to capital markets, which have themselves been under considerable stress. Higher costs and lower availability of capital impede economic growth, which impacts employment levels and corporate profits, which affect stock prices. These linkages in the economy suggest that the serious problems for the U.S. housing market will worsen the already weak state of the economy.
Eventually, all economic slowdowns reach a bottom, and a (sometimes rapid) recovery follows. The catalysts for such a recovery are not provided by the recent housing law.
If a stabilized housing market is necessary for an economic recovery to begin, some rather localized regions of the U.S. are likely to recover much sooner and faster than others. Housing prices will tend to move up or down in each small region until supply and demand are balanced in that region. Demand is determined by many factors including employment opportunities available to homeowners, availability and cost of transportation to work locations, availability and cost of financing, perceived advantages and costs of owning compared to renting, and quality-of-life issues. Some of these factors can vary rapidly in a short distance. Economic strength in areas in which demand first begins to pressure supply will gradually spread to weaker areas.
We are confident that an economic recovery will happen, but the fact that the economic slowdown was initiated by housing, which always consists of highly localized markets, makes the timing and mechanism of a recovery rather uncertain.