America's Half-Forgotten Housing Crisis

On the housing front, the good news is that the president wants Mel Watt to head the FHFA. The bad news is that, precisely because the president wants him, there is no certainty that Mel Watt will be confirmed. The really bad news is that the problems in the U.S. housing system are currently so entrenched that, even if he is confirmed, Mel Watt will be hard-pressed to resolve them.

Of course, on the surface of things, the housing market is apparently improving without help from any new head of the Federal Housing Finance Agency. Housing starts and house sales are both up. Prices are at last beginning to rise. Mortgage rates are at historic lows; and most welcome of all, the number of mortgage holders who are still underwater is beginning to fall. Currently, house prices are rising at their fastest rate for seven years (9.3 percent up on a year ago). The sale of new homes in March ended the best quarter of new house sales since 2008. The inventory of unsold houses in March was the lowest for that month since the year 2000. Competition between builders for new land pushed average values up 13 percent in 2012, the first annual gain since 2005; and rising house prices lifted 1.7 million homeowners out of negative equity in the last twelve months alone. The number of foreclosures is currently four percentage points down from its peak in early 2010.

But beneath the surface, real problems remain.

One problem is the sheer number of foreclosures still in the pipeline, and the related number of home owners whose mortgages continue to be greater than the value of their property. The recovery of the private housing market is at best patchy: as late as October 2012, 65 percent of all U.S. housing markets still had average prices lower than before the 2008 financial crisis. "Florida, for example, is still in deep trouble, with home prices about 40 percent below their highs and one in eight mortgages in some stage of the foreclosure process." Overall, nearly 14 million homeowners still have mortgages that are under water, and that is still nearly 20 percent of all mortgage holders in the United States. Most of those homeowners are still regularly paying their mortgages, and so remain relatively safe from foreclosure; but even so, at the end of 2012 "about 10.8 percent of mortgage loans on one-to-four unit homes were either in foreclosure or at least 30 days past due." At least 792,000 Americans actually lost their house through foreclosure in 2012, and bank foreclosures are still running at a rate of over 40,000 a month. Indeed "the percentage of loans in foreclosure remains a staggering eight times higher than it was in 2005" -- 5.3 million American households behind on their mortgage payments.

"No age group, race, or ethnicity has been spared from the effect of declining home values." On the contrary, there were close to 3 million older Americans "at risk of losing their homes" as late as December 2011, with AARP then reporting that "the rate of serious delinquency of older Americans had outpaced that of young homeowners from 2007." A year or more later, the number of foreclosures may now at last be falling: but the number of what often replaces simple foreclosure -- short sales, where the owner sells for less than the outstanding mortgage and the bank absorbs the loss -- is actually on the rise. People still lose their homes, that is, but walk away without mortgage debt. So although on the surface, things might be getting slowly better in the private housing market, when examining the country as a whole, for every individual still caught up in the ongoing U.S. housing crisis the loss of a home is as traumatic as ever.

A second problem is the sheer number of people still living downwind of their own foreclosure crisis, with all the associated loss of wealth and self-respect associated with the repossession of their property. "More than four million Americans have lost their homes since the housing bubble began bursting six years ago;" and the vast majority of those four million lost their homes because they lost their jobs, not because they had in better times taken out mortgages that they could not afford. Even so, for all their lack of guilt here, each of those Americans will face a complex web of rules, and years of delay, before being able to purchase housing again. And since the house is the major asset that most of us possess, its loss is always particularly destructive of wealth for those with the fewest resources. It is not the rich who are being foreclosed. It is those on the margin of the core middle class. It is particularly middle class minorities who have taken the greatest hit on both their personal wealth and their associated credit scores. Falling house prices since 2008 have pulled median white net-worth down by 27 percent but median black net-worth down by anywhere between 40 percent and 53 percent.

It is not just ethnicity in play here. Generational issues factor in too. One of the most entrenched and disturbing features of the recession caused by the housing crisis/financial meltdown of 2007/8 is the fall in the number of independent households now in existence in the United States: a number down -- Catherine Rampell tells us -- by more than a million from the level which our demographics would normally require. Young people are not just losing houses. They are also neither buying nor renting them in the numbers they previously did. Instead, too many of them are camping -- camping with parents, camping with other relatives, or camping with friends: "in 2007, 1.3 million unemployed adult children were living in their parents' homes. This year, the total is about 2.5 million." When conservatives go on about strengthening the American family, this can hardly be the kind of strengthening they have in mind.

A third problem is the continuing and now growing difficulties in the private rental sector and in publicly-provided housing. The very fact that more people find themselves unable to buy a house has increased demand for rental properties; and the rental sector now has this new and morally questionable extra dimension -- big firms buying up foreclosed homes at bottom-basement prices in short sales or court-organized auctions, then renting them out and securitizing the rental income. In such processes, hedge funds benefit. Renters do not. Indeed the paradox here is a stark one: "as rental incomes continue rising - they climbed 0.8 percent in the third quarter [of 2012] to a national average of $1,090 a month - home ownership is increasingly becoming cheaper than renting" again. The vacancy rate for rented homes is now down to 8.6 percent, and home ownership is down 4 percentage points from its 2005 peak (each percentage point represents about one million households ). As rents rise under the pressure of this growing demand, people at the bottom of the income ladder find even renting a home to be a harder and harder thing to do.

Renting was difficult enough even before sequestration kicked it; and right now sequestration is actually making renting more difficult for Americans on low or no income. It is triggering cuts in housing benefit: some 140,000 fewer housing vouchers are expected to be issued in 2014, at a time when the need for them has never been higher. In addition, the same Washington preoccupation with the scale of public debt has reduced still further the already inadequate levels of state and city investment in public housing. So it is not surprising that -- at the very bottom of the U.S. housing market - the number of households facing what HUD calls "worst case housing needs" has risen dramatically (by 43 percent) since 2007: 8.5 million households now, as against 5.9 million households in 2007. ("Worst case housing needs" mean households with no housing assistance and either paying more than half their income in rent and utilities or living in severely substandard housing. ) If there is any comfort at all to be taken from the current data at the bottom end of the housing chain, it is this: at least the number of the homeless has remained steady throughout the recession, reflecting the seriousness with which the Obama administration has worked on programs to house veterans and the chronically homeless.

Which suggests, of course, that housing policy can work if it is seriously pursued. Oh that it was and that it had been, across the whole of the sector; but that is not the case. On the contrary, Wall Street is back to its bad old ways -- speculating on property again -- in part because prosecutions for foreclosure fraud have not been pursued, and in part because the settlement between the big banks and the states' attorneys-general has still not yielded the scale of principal reductions that the agreement promised. Access to mortgages remains difficult because those same banks have gone back to very high underwriting standards -- a kind of poacher turned gamekeeper transformation that has taken us from too loose a regime in the private housing market to one that is now too tight. Those high underwriting standards remain in place too because the FHFA under Edward DeMarco has consistently blocked administration calls to allow principal reductions on houses now worth less than their mortgages, and has done so in spite of repeated calls to do so from both the administration and liberals in Congress. The FHFA supervises Fannie Mae and Freddie Mac, of course, and both those GSEs are currently back in strong financial shape. That must make Edward DeMarco happy -- their financial strength (and the protection of taxpayer interests) have been his repeatedly-asserted primary concerns -- but that happiness has not translated itself yet into more and more Americans enjoying low mortgages or manageable rents. So what frankly is gained for the rest of us by that financial strength? With evidence available that the administration's proposals would actually save the taxpayer money, that gain might be clear to Mr. DeMarco but it is not clear to me.

If he replaces Edward DeMarco, Mel Watt will remove a key obstacle to a more active housing policy. But important as that development will be, we need so much more than simply a change at the top, if the pain of this housing crisis is ever to ease. We need extensive principal reductions of the kind now being blocked. We need an easing of excessively restrictive underwriting terms. We need large-scale refinancing at lower rates of interest. We need renewed funding of public housing. We need an end to sequester cuts in housing benefit. We need Fannie & Freddie to remain in public hands and to be put to clear and progressive public purposes. We need all these things not simply because the housing market remains a drag on long-term economic growth, though it certainly remains that. We need these things because less-privileged American homeowners and renters have suffered unnecessary stress long enough, and have done so in very large measure through no fault of their own.

Tragically, the fact that Mel Watt might make a difference to the viability and character of housing policy in the United States is exactly why Republican senators might yet block his confirmation. Heaven forbid that we have a publicly managed housing system that actually works. If we did, how could Republicans credibly talk up the importance of the unregulated market forces they favor, the very market forces that created this housing crisis in the first place. In housing, as in so much else, the political logic dominant inside the Washington beltway, and the social requirements paramount outside it, are running in opposite directions. This fundamental lack of symmetry is the modern American tragedy from which we somehow now need so desperately to break.

This argument builds on earlier ones to be found on pages 105-126 of Pursuing The Progressive Case

First posted with full citations at