RAY SUAREZ: The housing problem may have begun with the subprime and foreclosure crisis, but there are big worries about the national housing market, as well.
Yesterday’s report from the National Association of Realtors provided a glimmer of good news: Home sales last month posted their largest increase in a year.
But the boost in sales may have been fueled by a record 11 percent drop in single-family home prices. The realtors association reported today the national median home price fell to nearly $196,000, down 8 percent from $213,000 last year.
And with foreclosures at an all-time high, all three presidential candidates are talking about the crisis.
Both Democrats want greater regulation of mortgage lenders and want to let courts modify mortgage payments for those facing foreclosure, but Senator Hillary Clinton has gone further, calling for a 90-day moratorium on foreclosures and a five-year freeze on interest rates for subprime borrowers.
In a speech yesterday, she said all Americans are affected by the crisis.
SEN. HILLARY CLINTON (D), New York: Home prices dropped almost 9 percent last quarter, home prices for everyone. If you’ve paid off your home, if you have a fixed-rate mortgage with a manageable interest rate, you have suffered the steepest decline on record.
RAY SUAREZ: Senator Barack Obama opposes an interest rate freeze, saying it would dry up credit. And he told Gwen Ifill last week it’s important to modify lending practices.
SEN. BARACK OBAMA (D), Illinois: That will provide some assurance that there’s not going to be just a bottomless pit of bad debt out there and hopefully banks then and other financial institutions will start having a little more confidence and start doing the normal business that needs to be done.
RAY SUAREZ: Republican Senator John McCain hasn’t laid out specific proposals, but he said in a speech in California today that there should be limits on government action.
SEN. JOHN MCCAIN (R), Arizona: Any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren’t. I will consider any and all proposals based on their cost and benefits.
RAY SUAREZ: Congress is expected to take up legislation in April, but it could be months before there’s an impact on the housing market.
'In the middle of a decline'
RAY SUAREZ: For some perspective on the health of the housing market, we turn to Nicolas Retsinas, the director of the Joint Center for Housing Studies at Harvard University.
And all these same statistics are crossing your desk. What do you make of this latest Shiller-Case report indicating continued drops in house prices?
NICOLAS RETSINAS, Joint Center for Housing Studies: Well, it's more and more bad news. It's hard not to look at the newspaper or read reports and see further evidence of a declining housing market.
So, again, no big surprise. We all know that we're in the middle of a decline. The question is: How long and how bad will this be?
RAY SUAREZ: Well, at the same time we're getting word that existing home sales posted a very healthy gain last month. Is one a consequence of the other, that rise in sales coming from the drop in prices?
NICOLAS RETSINAS: It really is. It is Economics 101. It's a reminder: Prices do matter. We've seen a drop in prices spur some home-buying. So you're starting to see an increase in sales, still not enough to clear the inventory, the overhang that's there.
But, again, falling prices are impacting sales. And at some point they'll reach an equilibrium. When they do, the recovery might begin.
RAY SUAREZ: Well, even if the declines in price continue for a little while to come, won't we still be above the prices that we saw, for instance, at the beginning of the decade?
NICOLAS RETSINAS: Very much so. As a matter of fact, if you look at it, if you bought a house five years ago and even farther back, and you sold the house now, you'll likely still be making a lot of money.If you bought the house in the last year or two and you tried to sell it today, then you'd probably be losing money. So, right, it depends how long you've had the house. Over the long term, we're still sort of working off very significant appreciation.
Different regions, different issues
RAY SUAREZ: We tend to report these numbers sort of at a cruising altitude of 35,000 feet, looking at the United States as a whole. But if you broke the country up into regions, are there particular places that either aren't feeling the same downward pressure or are feeling it worse than the rest of the country?
NICOLAS RETSINAS: You're right. It's an awfully big country. And if you start to look within the country at different regions, both the causes and the outlooks are very, very different.
For example, if we looked at the Upper Midwest, there you have very significant economic problems. So it's not a reaction to an overheated housing market; it's a reaction to a slumping sort of economy.
If you looked out in the Southwest and out in California, there you have a case of overbuilding. Builders overbuild; investors over-borrow; borrowers over-borrow; so you have a build-up of inventory.
Other parts of the country just had credit gone wild. Too many people got credit that they didn't have the ability to pay back and now we're paying the price for that. So lots of factors, lots of causes, depending where you sit.
RAY SUAREZ: A lot of people had to borrow sort of on the margins. And when these housing price declines have come, it's basically wiped out their equity and, in many cases, wiped out their ability to adjust to the changing conditions. Have we seen the worst of that already? Or is a lot more still to come?
NICOLAS RETSINAS: More to come, sadly. Most of these mortgages that have these exaggerated reset provisions, where the payments go up, were originated in late-'05, '06. Many of them had timelines of about 48 months.So over the next year, throughout 2008, every quarter will have about $40 billion to $50 billion of mortgages that will be reset. Many of those borrowers have a difficult time paying off their current mortgage under the current terms. It's going to be impossible for many to pay the terms that have been increased.
Disagreement over government's role
RAY SUAREZ: Well, the Bush administration, through the offices of the Treasury Department, the Federal Reserve bank, lenders, they've all come up with various fixes and proposals over the last couple of weeks to try to stem the tide, to slow things down.
Do we know yet, how long will it take until we know for sure whether any of this has really helped?
NICOLAS RETSINAS: Well, a lot of the efforts put forward particularly by the executive branch have been relatively modest and mostly voluntary. They're all steps in the right direction, but I think the negative momentum has built up so much it's going to be difficult to turn the clock back and stop this downward sort of thrust of the market.
The Fed has been more aggressive, more creative, but, again, hasn't really affected the housing market. So in some sense I think it's fair to say the government has under-reacted to this problem, even though the market may, in fact, have over-reacted.
RAY SUAREZ: What does it tell you that, in the past several days, all three major presidential candidates have come up with proposals on how to deal with it, even though one of them won't get to sit at the control panel for still months to come?
NICOLAS RETSINAS: Well, I think they realize that this is a big problem affecting a lot of people. No one, of course, is interested in bailing out Wall Street traders. No one is interested in, quote, "bailing out investors."
But there are a lot of people losing their homes, and probably as significantly even people who aren't losing their homes are affected. A foreclosure next door also lowers their property value. So in the terms of an economist, there are externalities that are substantial. I think it is those externalities that is prompting attention by the presidential candidates.
RAY SUAREZ: Today in his speech on the problem, John McCain took some pains to point out that overall, when you're looking at all the tens of millions of existing mortgages in America, it's only a very small number that have gone bad, but that the effect of those ones that have gone bad has been disproportionate to the market overall.
Is he right? And if he is, why is it that that small number has had such a large effect?
NICOLAS RETSINAS: Well, the small number is still a big number. For example, in 2007, over 1.5 million foreclosure proceedings were initiated. It's estimated up to 2 million people may lose their home.
That's a relatively small number when you look at the total number of people who own homes. But it has had, as I've indicated, a contagion effect on the entire neighborhood and, most significantly, it's also frightened all lenders, so it's not just subprime lenders who are nervous. Anybody who is loaning money is skeptical that it's going to get paid back.
As a result, they either don't loan it or, if they loan it, they loan it at a very, very high price.
RAY SUAREZ: Nicolas Retsinas, thanks for joining us.NICOLAS RETSINAS: Thank you.