Issue of the week: Those horrible housing numbers

last updated 8 January 2015

Even the pessimists were too optimistic, said John Gittelsohn and Bob Willis in Bloomberg.com. This week’s report on July home sales was far worse than even the grimmest forecasts, with sales falling to an annual rate of 3.83 million units, 25.5 percent below the already depressed level of a year ago. It’s the housing market’s worst showing since 1995. The gut-wrenching report heightens the possibility that housing, which led the economy out of seven of the last eight recessions, this time “may kill the recovery.” That’s because the ripples from a depressed housing market spread far and wide. As home sales decline, so do sales of big-ticket items like furniture and kitchen appliances, which along with home construction accounted for about 15 percent of gross domestic product in the second quarter. And with average home prices down about a third from their 2006 peak, many homeowners have no equity to borrow against, leaving them short of cash for purchases like vacations and cars.

So much for the White House’s efforts to revive housing, said Stephen Spruiell in National Review Online. The Obama administration’s home-buyer tax credit of up to $8,000, which expired at the end of June, only postponed the day of reckoning. An even worse policy was the Home Affordable Mortgage Program, or HAMP. This supposedly well-intentioned program was advertised as a way to keep struggling borrowers in their homes. But the administration’s own bailout watchdog assailed the program for adding $50 billion to the national debt while failing to “put an appreciable dent in foreclosure filings.” In fact, all HAMP did was ease “the crush of foreclosures for a while,” thereby giving mortgage lenders “room to breathe.” Continuing such misguided programs would surely “elongate what remains a painful economic downturn,” said John Tamny in Forbes.com. The only way to save the housing market is to “let houses and mortgage securities find their natural, market-clearing level.” That would enable “underutilized capital” to migrate “toward more productive pursuits” and goad the economy back to life.

Housing prices will rise—someday, said David Streitfeld in The New York Times. But even then, “homeownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.” Many economists predict that house prices “will only keep up with inflation.” Americans accustomed to viewing homeownership as a surefire investment should get used to the new reality, says economist Dean Baker. “People shouldn’t look at a home as a way to make money,” he says, “because it won’t.”