Bailout isn’t enough for housing market
TEXT OF COMMENTARY
Kai Ryssdal: Here’s another bit of housing fallout from the credit crisis: Rates on 30-year fixed mortgages have hit their highest levels in a month. Commentator and economist Chris Mayer says pushing that rate down ought to be front-and-center in cleaning up the market mess.
Chris Mayer: The news from the housing market is grim. Housing starts are at their lowest level since the early 1980s. And there are more vacant homes’s than at any time since the Census Bureau started keeping data in 1960. Millions of homeowners owe more on their mortgage than their house is worth. Foreclosures are accelerating. House prices continue to fall. Whether or not we eventually pass a bailout, will have little direct effect the housing market, which is dragging down our economy and crushing our financial institutions.
But with its takeover of Fannie Mae and Freddie Mac, the federal government is finally in a position to act.
What should the first course of action be?
We must bring down mortgage rates.
Interest rates on 10-year U.S. Treasury rates fell by nearly 1.5 percent since the middle of 2006. But mortgage rates have fallen less than half that amount. Reducing mortgage rates another three-quarters of a percent or more could save homeowners billions a year in interest payments.
Yet more must be done. To reduce the inventory of vacant housing units as well as to encourage saving, the government can offer to match the downpayments of new buyers up to some reasonable cap.
And the government should allow existing borrowers to get out from under their current adjustable rate or subprime mortgages. How? By relaxing loan-to-value requirements on borrowers refinancing a non-prime loan. Homeowners could accrue additional equity in their home over time by making regular mortgage payments, while the government might receive a portion of the appreciation if housing prices recover.
Some would argue that subsidizing housing was what got us into this mess. But such arguments miss the fact that house prices have already fallen to the point where buying in most markets would be cheaper than renting — if only buyers could get reasonably priced credit.
Two-thirds of Americans own their home. Allowing a further collapse in house prices will help no one and threatens to continue the vicious cycle driving down the economy and destroying our banks. The credit crunch will not end until housing market stabilizes.
Ryssdal: Chris Mayer is professor of Real Estate, Finance & Economics at Columbia University.
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