WORD ON THE STREET: Historically, the housing market has been a major power engine for economic growth, particularly coming out of a recession. This does not seem to be the case this time. Additional foreclosures and a shadow real estate owned (REO) inventory loom.
As a result, housing starts may only reach 700,000 units in 2011 – half the normal historical annual production, although an improvement from the 554,000 and 586,000 starts, respectively, in the past two years. That implies little addition to economic growth. It also implies a potentially faster than expected ‘cleaning up’ of what has been a bloated housing inventory, particularly as existing-home sales pick up.
Since jobs are now being created, albeit at a slower-than-desired rate, existing-home sales will likely see some improvement in 2011. Changes in median home prices will be determined by how fast the inventory is worked off. Assuming that the pace of home sales can hold at near 5.3 million units, as occurred in the final month of last year and in January, then the inventory absorption rate should keep home values broadly stable.
This, combined with the continued reduction in builder activity – resulting in a 40-year low on newly constructed inventory – should help absorb some of the distressed shadow inventory that will be reaching the market. The National Association of Realtors expects local housing-market recovery paths in terms of both sales and prices to follow in the footsteps of local job-market conditions. Those metros with reasonably healthy job-creating markets have so far been Washington, D.C., Boston, Minneapolis, and Seattle. The local economies with energy exposures – such as those of Alaska, North Dakota, Oklahoma, and Texas – are also doing relatively well.
Improvements in the job market are helpful for home sales. We also need to be mindful that improved home sales help create jobs. Research suggests that 1 million additional home sales in 2011 over 2010 will mean 500,000 private-sector jobs created in the country.
The housing bust of recent years has unfortunately forced as many as 11 million homeowners into underwater situations, and the aggregate homeowner wealth has declined. The median net worth – the value of everything owned minus everything owed – for a homeowner is estimated to have fallen from $230,000 in 2007 to about $170,000 in 2010. However, the net worth of homeowners still outpaces that of a typical renter, which is only $4,000 to $5,000. That is a testament to long-term benefits for homeowners who steadily pay down their mortgage.
Aside from the eventual financial benefits gained over many years for homeowners, let's not lose sight of the intangible societal benefits of homeownership: better communities, higher civic participation, lower juvenile delinquency, higher pupil test scores and higher voter participation rates among home-owning families versus tenant (rental) households. As we continue to discuss the future of housing finance, we must consider the intangible social stability that arises from having a super majority of the population that are property owners. Realtors are not suggesting that homeownership will cure society's ills, but the U.S. has seen the benefits of homeownership and private-property rights that are protected by our Constitution.
The belief in homeownership as a pillar of American society is why Realtors are reaching out, with great concern, to [their] national association to better understand the intentions of the administration, Congress and numerous regulatory bodies that are perceived as actively working to devalue, or place severe obstacles in the path of, homeownership. Realtors agree that reforms are required to prevent a recurrence of the housing market meltdown, but unnecessarily raising [the required] down payments will have ramifications for the overall economy, as well as for housing.
Congress intended to create a broad exemption from risk retention for historically safe mortgage products. Realtors believe that federal regulators should honor congressional intent by crafting a qualified residential mortgage (QRM) exemption that includes a wide variety of traditionally safe, well underwritten products such as 30-, 15- and 10-year fixed-rate loans, 7-1 and 5-1 adjustable-rate mortgages and loans with flexible down payments that require mortgage insurance. The QRM is likely to shape housing finance for the foreseeable future and is, therefore, very important.
Another reason QRM is important is that it serves as a precursor for what the future government-sponsored enterprises (GSEs) are likely to be eligible to securitize. A poor QRM policy that does not heed the congressional intent will displace a large portion of potential home buyers – which, in turn, will slow economic growth and hamper job creation.
Furthermore, frequent increases in fees from both the Federal Housing Administration and the GSEs and credit overlays from lenders will unnecessarily increase the costs to homebuyers and discourage these consumers, who can otherwise afford a mortgage, from participating in the housing market. By some estimates, 10% to 15% of otherwise qualified buyers with a demonstrable ability to repay will be turned away due to the overly stringent requirements. This represents approximately 500,000 home sales that won't happen, further dragging out the housing and economic recovery. (Every two additional closed real estate transactions can create one job; 500,000 sales can produce 250,000 additional jobs).
Realtors believe that the pendulum on mortgage credit has swung too far in the wrong direction and that it is hurting consumers and the economy. The harmful products that led to the bubble and crash are gone, and no one is looking to bring them back. However, making it harder for those who can afford a safe mortgage does not further the goals of recovery.
Reduced home buying activity hurts numerous businesses that are part of the housing industry (e.g. home renovation, remodeling, furnishing, etc.) and our state and local governments through reduced tax revenues. So, even though it is our belief that housing will not pull us out of this recession alone, the hampering of its recovery will have a severe negative impact on any recovery that is, or soon to be, under way.
The idea of homeownership has been attacked from many quarters because of the housing bubble and subsequent bust. Many mistakes were made during the cycle. However, as the country takes a critical look at federal housing policy, let's not lose sight of the immense intangible value of homeownership – sustainable homeownership – to our country.
Ron Phipps is the 2011 president of the National Association of Realtors. This article is adapted and edited from testimony delivered on March 9 before the U.S. Senate Committee on Banking, Housing and Urban Affairs. The full testimony is available online.
