The housing crisis is certainly a tempting target for government intervention. With over six trillion dollars lost in home equity and a staggering 23% of mortgages under water at the moment, the temptation for action seems impossible to resist — and in fact, this administration and Congress has repeatedly indulged that temptation, as Mort Zuckerman explains, and futilely. The futility arises from a lack of understanding that the real problem in the housing markets isn’t really housing at all:
This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and then through every recession since. Each time, residential construction preceded the recovery in the largereconomy. This time, in the Great Recession, a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings, and current spending. Every further 1 percent decline in home prices today lowers household wealth by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over 5 million jobs in residential construction.
That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to the level of 2.4 percent this year. This is significant if you recognize that a 3 percent top-to-bottom decline in real GDP constitutes a serious recession.
Government programs to stimulate housing sales have not helped. There have been eight of them. One, which expired most recently (in the spring), was an $8,000 tax credit for housing contracts. All of these have done little more than distort the pattern of housing demand and actually pulled forward hundreds of thousands of units at the expense of future growth.
In fact, what these programs did was to create even more uncertainty and distortion in markets that had yet to recover from the distortion and uncertainty from over a decade of government intervention that created and collapsed a bubble in real estate and housing. At a time when the market needed to find its value equilibrium and determine a rational value, the Obama administration and Congress kept tinkering with the demand in order to create a short-term illusion of recovery. That came from a purely political calculation, and was as futile as any political intervention in markets turns out to be.
The administration still does not understand the root problem. The collapse in equity is partly a rational revaluation of assets after an irrational bubble created by Congressional intervention in mortgage lending. That simply cannot be avoided; it can only be postponed, and the pain dragged out over a longer period of time, which is precisely the effect these short-term interventions create. The main problem in housing and foreclosures, though, isn’t revaluation of property but lack of income for current and potential owners of property, as Zuckerman notes:
The sad fact is that housing problems never left the recession of the last several years and it doesn’t look as if they are going to leave anytime soon. The ultimate solution remains the same as the solution to the country’s broader economic crisis. That is, getting millions of people back to productive work.
If we want to solve the housing crisis, we need a lot more private-sector jobs than we have right now, probably at least five to six million of them and maybe more than that. We may be as far behind as 10 million jobs, considering population growth. Even if we began netting 200,000 per month in new private-sector jobs each month, it will take years to accomplish (we would only outpace population growth by 100,000 at that rate), and the housing markets will continue to slide.
We need much more robust growth, and we know how to do that: cut taxes and regulation and encourage capital investment in a broad range of industries. Government has to get out of the way and quit picking winners and losers, which is what investors do much more efficiently. This administration and Congress are going in the opposite direction, which means we will continue to extend the pain for the foreseeable future.