A new deal for the housing market
TEXT OF INTERVIEW
Tess Vigeland: A course of treatment for the ailing housing market? Shot of adrenaline, stat.
The federal government says average home prices in October dropped 3.5 percent from last year. The U.S. Conference of Mayors forecasts another 7 percent drop over the next year. What to do?
Well, economist Robert Shiller wrote an Op-Ed in the New York Times recently calling for major new government initiatives to fix the housing situation and he joins us now:
Vigeland: Welcome back to the program.
Robert Shiller: Hi.
Vigeland: In your editorial in the Times, you compared today’s housing market to that of a big decline that happened between 1925 and 1933 and all of the big reforms that spurred. Remind us what some of those reforms were.
Shiller: First of all, it used to be that people would get short mortgages — three years, five years — that would have you pay back the principal at the end and people were losing their houses because they couldn’t refinance. So what they did is they moved to the long-term, fixed-rate mortgage and this was done through government intervention, through the Home Owners’ Loan Corporation and the Federal Housing Administration, which were just set up in 1933 and 1934. And we also invented other things, like deposit insurance, at that time.
Vigeland: Back to the current situation, what are your suggestions?
Shiller: I think that we need to do something about the kind of erosion of regulatory standards that has occurred in the mortgage industry. Since 1990 or so, we’ve seen the growth of subprime lenders who are not banks and they’re escaping from regulation. I like the idea that Elizabeth Warren, who’s a professor at Harvard Law School, has proposed: that we should create a Financial Product Safety Commission modeled after the Consumer Product Safety Commission that would collect information about how people were being treated, how various financial products are suitable or not for individuals and whether some things are amiss.
Vigeland: You make a suggestion of a kind of a price insurance that home owners would be able to pay for. Can you explain what that would be?
Shiller: Yes, what’s happening right now is that home prices are falling and they’re falling rapidly in a number of places. And so, they’re in trouble. If they sell their house, they can’t pay back their debts. This has brought on a wave of defaults. So this leads me to think that really, mortgage contracts should have entailed some kind of protection against this kind of event — you might call it home equity insurance or a mortgage with down payment insurance. We could have offered these all along. We didn’t, so now there’s all this talk about adjusting mortgages ex poste. It’d be better if it was done from the beginning; mortgage contracts should have had some flexibility built in.
Vigeland: What do you think it’s going to take to get everybody to the table to talk about these issues?
Shiller: Well, I think it could happen and the thing that would make it happen would be a worsening of the crisis. I think there’s a good chance that we’re going to have a recession and we’ll see a lot of defaults on mortgages and people are going to get angry and say “look, let’s do something important about this problem.”
Vigeland: Robert Shiller is a professor of economics and finance at Yale. He’s also the co-founder and Chief Economist of MacroMarkets LLC and also the author of “Irrational Exuberance.” Thanks so much for coming in.
Shiller: It was a pleasure, Tess.
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