Did America Learn Anything From the Housing Crisis?
The stabilization of the U.S. housing market is an essential component of the broader American economic recovery, and first-quarter gross domestic product data prove that. In the first three months of the year, when GDP expanded at an anemic 0.1 percent annual rate, the housing sector was a significant drag on the economy.
January’s cold weather was a major culprit. That month, housing starts — a measure of residential construction — dropped to the lowest level experienced in almost three years. Data from the S&P/Case-Shiller home price index of property values for February revealed that ongoing increases in mortgage rates caused demand for both new and existing homes to slow. Rising prices and borrowing costs have also priced out many prospective buyers, and consumers still remain cautious.
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Together, those factors created a chilling effect on the housing market. In fact, residential fixed investments lowered GDP growth by 0.18 percentage points in the first quarter after contributing 0.33 percentage points to U.S. economic output for all of last year. The collapse of the housing market pushed the United States into the Great Recession, but the U.S. housing market is now a major engine of economic growth.
The significant contribution that sector made to GDP last year was evidence of growing demand, and it triggered an expansion of home construction and pushed up home prices, increasing homeowner equity and therefore boosting household wealth for American homeowners. In 2013, housing prices rose 13 percent, a jump that suggested the housing market was well on its way to recovery. Broadly, excluding the winter-induced slowdown, construction and homebuyer activity paint a picture of growth. That 13 percent increase in home prices lifted 4 million homeowners up from being underwater.
Yet it cannot be ignored that the housing recovery lost momentum early this year. Nor can the other lingering reminders of the housing crisis be ignored. It remains difficult for many American households to access the credit needed to purchase a home, and that further hurts the U.S. economy.
The Obama administration has noticed that the credit score the average borrower needs to be eligible for a government-guaranteed loan is significantly higher than before the financial crisis and subsequent recession. It is also higher than usual given the current economic fundamentals like the improving job market, the stabilization of business confidence, and the falling federal government deficit.
In an effort to address this loan eligibility issue, the “Federal Housing Administration (FHA) and the Federal Housing Finance Agency (FHFA) took important steps last week to ensure that more responsible, creditworthy families can obtain a loan when they’re ready and prepared to buy a home — while ensuring we do not return to the days of unsound lending practices,” said Council of Economic Affairs Chair Jason Furman and Jeff Zients, director of the National Economic Council, in a White House press release.
The steps Furman and Zients mentioned were officially announced by Mel Watt, the director of the Federal Housing Finance Agency, at a May 13 speech before the Brookings Institute. “Lenders believe that too much uncertainty still exists in this area for them to ease their credit overlays,” he said. This leaves credit standards tighter than they should be given the health of the economy.
That same day, the FHA issued its “Blueprint for Access,” which detailed in general terms how the agency would expand access to credit for “underserved borrowers.” The steps included encouraging borrowers to attend a counseling program approved by the Department of Housing and Urban Development and establishing clear “rules of the road” to help lenders quantify the risk of making a mortgage loan while ensuring that greater access does not result in a return to “the days of unsound lending practices.”
To further clarify government policy, the FHA created a handbook detailing standards for lenders. If loans meet those credit guidelines, originators will not be penalized. The press release accompanying the announcement of the new rules emphasized the importance of a healthy housing market to the sustainability of the economic recovery.
Furman and Zients argue that the new FHA rules have “already begun to pay off,” noting that some banks — like Wells Fargo — have reduced the credit score required to qualify for for government-guaranteed loans. “As we take these steps to strengthen and provide certainty to today’s housing market, we also need a long-term solution that advances the president’s principles for comprehensive housing finance reform, a solution that will lead to a safer and more inclusive system,” they said.
A long-term solution has materialized in the form of the Housing Finance Reform and Taxpayer Protection Act of 2014, which was advanced by Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and ranking Republican Mike Crapo of Idaho, along with Republican Sen. Bob Corker of Tennessee and Democratic Sen. Mark Warner of Virginia.
Freddie Mac and Fannie Mae own or guarantee 60 percent of all U.S. home loans, but because of the role they played in the financial crisis, the two government mortgage financiers have drawn much criticism. However, congressional Republicans and Democrats generally agree that their services are still needed, as removing both institutions from the equation would increase the cost of taking out a mortgage for borrowers.
By comparison, President Obama would like to wind down their involvement in the U.S. housing market, but even the White House has argued that any reforms must leave the government involved to some degree in order to preserve easy access to the 30-year mortgages that are a staple for middle-class buyers. Unsurprisingly, the main issue standing in the way of reform is the role of the government.
But while the Obama administration has hailed its housing reforms, the administration’s housing policy has been tentative at best. For the most part, it has avoided any big changes that could further weaken the housing market or banks. It is true that some bolder steps came later in Obama’s first term, including national mortgage settlements made with big banks and the establishment of aid programs for homeowners overseen by the Department of the Treasury.
Though Obama’s economic advisers have said time and again that the administration wants the housing market to function without significant government support, it has taken few steps to advance that goal.
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