Housing has stood out as the sick man of the U.S. economy in bad times and better times. For all its work on economic stimulus in various forms, the Obama administration has never been able to get its hands around a solution for the housing crash. That's not unprecedented--the New Deal never came up with a lasting solution for the housing crisis of the '30s, either. Housing is tough.
Over the last couple of days Brad DeLong, Kevin Drum and Felix Salmon have all taken a crack at the scale and the reasons for the weak performance of housing during this recovery. They approach the issue from slightly different perspectives, and the truth looks to emerge from a triangulation among them.
Here's that truth, as we see it: the 30-year fixed mortgage is still the bedrock of residential housing and still should be. That means restoring Fannie Mae and Freddie Mac to their traditional roles as the backers of that market.
After years of ineffectiveness by those government-sponsored mortgage firms, there's finally hope that they'll rise again to the challenge, with this month's installation of former Rep. Mel Watt as head of the Federal Housing Finance Agency, which oversees both firms. Watt already has made it clear that he intends to expand the availability of mortgage credit as a priority.
UC Berkeley economist DeLong plainly thinks this is the right course. He observes that gross domestic product has been devastated by "residences not built since 2007 because of the financial crisis, resulting depression, and breaking of housing finance," and "using the FHFA and the GSEs as tools of macroeconomic policy might well be superior" to other recovery tools. He recalls that he had this same conversation with Lawrence Summers in the summer of 2008, before Summers became Obama's chief economist. They agreed that the FHFA was a good tool for economic stabilization, and DeLong counts it as a mark against Obama's economic policy that it didn't happen.
Drum and Salmon both notice the sharp falloff in mortgage availability since 2006, when as Drum observes loans were too easy to get. Salmon thinks this is because the 30-year fixed is obsolete. He thinks it should be phased out altogether "since it’s a product no private-sector financial institution would ever offer, were it not for the distorting influence of Fannie and Freddie."
That's too facile. Salmon needs to take the historical view, which would tell him that the 30-year fixed is what got us out of the housing morass of the '30s and could do so again. David Min of the Center for American Progress lists its manifest virtues--it provides cost certainty to borrowers by shifting interest rate risk from borrowers to financial institutions better equipped to handle it. As I reported last summer, its long duration is exactly what gives homeownership its traditional stability.
Salmon blames the 30-year fixed for the fact that "anecdotally, it’s much harder to get a mortgage now than it used to be.... Here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years."
The problem with anecdotes is that they're lampposts that cast a very dim glow. The housing markets are resolutely local; there may be many reasons why Salmon's neighbors can't get mortgages, possibly including the peculiarities of condo finance and the high price of Manhattan real estate. The housing market in Southern California, by contrast, seems to be recovering its health quite smartly, as my colleague Andrew Khouri reported. The constraint here isn't the availability of mortgages, but of inventory.
Salmon cites a New York Times article that in turn cites a sharp falloff in mortgage originations by Wells Fargo and JPMorgan Chase in the fourth quarter of last year as evidence for shrinking access to credit for the average homebuyer. But those figures are misleading. What's really fallen off are mortgage refinancings. Since they're opportunistic, they're highly sensitive to changes in mortgage rates and therefore have plummeted as rates have moved up.
Mortgages for home purchase, however, bottomed out at the end of 2011. Quarterly originations for purchases have been increasing almost steadily on a year-to-year basis ever since then, according to the Mortgage Bankers Assn. The dropoff in refinancings has swamped the increase in new mortgages thus far, but that effect is ebbing. The MBA sees purchase originations reaching $796 billion in 2015, reaching the highest total since 2008.
They should be higher. But that again points to the key role to be played by Fannie and Freddie. You'll hear it said that the government should play no part in housing finance--that its influence is invariably "distorting," as Salmon writes.
The fact is that an entirely private housing finance system is a "pipedream," as Adam Levitin of Georgetown University lectured the House Financial Services Committee last summer. "It simply does not exist in any developed country in modern times and never has." If the U.S. wants a lasting housing recovery, the public sector must play a role, and a vigorous role. Step One: Take the shackles off Fannie and Freddie, and let the 30-year fixed mortgage work its magic.
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