Can Government Fix The Struggling Housing Market?

President Obama is expected to talk about jobs in Wednesday's State of the Union address, but should his administration be doing more for the housing market? William Wheaton, professor of economics and urban studies and planning at the MIT Center for Real Estate, says there's little the government can do to fix the housing sector.

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MADELEINE BRAND, host:

President Obama will be talking jobs, jobs, jobs tonight during his State of the Union address. Getting the unemployment rate down is key to the economys recovery, so hes fixing the housing problem. After all, the housing collapse was at the roots of the financial meltdown.

In December, sales of existing homes suffered their worse drop in 40 years. Still, overall sales for 2009 were up compared to the year before, thanks in large part to the first time homebuyers credit.

Well, should the government be doing more to help the housing industry? For answers, weve called on William Wheaton. Hes a professor of economics and urban studies and planning at the MIT Center for Real Estate. Welcome to the program.

Professor WILLIAM WHEATON (Economics and Urban Studies and Planning, MIT Center for Real Estate): Thank you very much.

BRAND: And do you think the president is doing enough to fix housing market?

Prof. WHEATON: Well, unfortunately, theres not a lot that actually can be done. Many of the foreclosures that we have going on right now are really due to job losses. Unfortunately, the best to way fix that is to fix the economy.

BRAND: Cant the government do something in terms of mitigating the rate of foreclosures? It does have several federal programs aimed at doing that, although by many estimations not too successful.

Prof. WHEATON: Well, I think thats the problem. Almost every proposal to help fix the situation has a severe drawback. Mortgage lenders dont really like to fix mortgages because they find a large fraction of mortgages fix themselves. And they also find that once they fix a mortgage, theres a fairly high probability of re-defaulting. So, youre just going to have to really strong arm, I mean, if you want to get anything done there.

And another proposal is that the government should simply provide some cash assistance to pay peoples mortgages who are temporarily unemployed that has the disadvantage of creating an incentive not to go back to work. So, its just its really not easy to fix this.

BRAND: So there isnt a way, you dont think, for the government to shape a response by the mortgage industry to say we are going to take a whole bunch of these mortgages that are underwater, which means that people owe more than the house is worth and rewrite them and write down the principle.

Prof. WHEATON: I actually dont think that very many of these mortgages that are technically underwater are going to default. There are several recent research reports that suggest that people will have to have a great deal of negative acuity 30, 40, 50 percent before theres even a small probability that theyre actually going to walk from the house that they were trying to build a life in and default. I know theres a lot of press that suggest theres a wave of 5, 10, 15 million people who are underwater who could default. We think virtually none of those people are going to default.

BRAND: Thats interesting, because many of them have defaulted already.

Prof. WHEATON: The data actually shows that the very vast majority of people that have defaulted have defaulted because they cant afford the payment, because theyve lost their jobs, some things happen to their familys situation as opposed to people who can afford the payment, but technically are underwater. Their house is worth 20 percent or 15 percent less than their mortgage.

BRAND: What this going to happen when the first-time homebuyers credit expires at the end of April and interest rates might go up?

Prof. WHEATON: Interest rates might go up considerably, and I think thats something that really worries the Fed chairman greatly. Im guessing that most of the people that are in negative acuity territory at this point are probably on fixed rate mortgages. So, Im a little more concerned about what rising rates would do to the new buyers of homes that have actually all of a sudden come out of the woodwork and are purchasing homes like crazy.

I think they could be greatly dissuaded if mortgage rates rise from five to six to seven to eight percent. And I think both Treasury and the Fed are working very hard to try and minimize the effect of rising interest rates on mortgage rates.

BRAND: Will you be looking for anything tonight from President Obama regarding housing?

Prof. WHEATON: I hope he can pull some little magic trick out of his sleeve to help the people that are unemployed at least stay in their house for some extra 12 months or 18 months to see if they can get back on their feet. Thats always a problem during recessions, and that would make me very happy.

BRAND: We have been talking about real estate and the housing market with William Wheaton. He is a professor of economics and urban studies and planning at the MIT Center for Real Estate. Thank you very much.

Prof. WHEATON: Delighted to have been here.

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For Obama's State Of The Union, It's All About Jobs

President Obama i i

hide captionPresident Obama is seeking to reassure voters that he is determined to create jobs.

Charles Dharapak/AP
President Obama

President Obama is seeking to reassure voters that he is determined to create jobs.

Charles Dharapak/AP

You can expect to hear a lot about jobs Wednesday night, as President Obama tries to defend his. Economic recovery is likely to dominate the president's State of the Union speech. Obama is looking to reconnect with recession-weary voters after last week's special election in Massachusetts put much of his agenda in doubt.

The State of the Union speech is an important milestone for any administration. But Princeton University presidential scholar Fred Greenstein says for Obama Wednesday night, the stakes are even higher than usual.

"The tide seems to be running against him suddenly, very forcefully, and it's important that he do what some presidents before him have done — which is to make a real correction and turn things around," Greenstein says.

Obama badly needs to change the subject after last week's special election in Massachusetts, in which Republican Scott Brown won a Senate seat the Democrats had taken for granted. And, as the president told a gathering of U.S. mayors last week, the subject he wants to turn to is jobs.

"You can expect a continued, sustained and relentless effort to create good jobs for the American people," Obama said. "I will not rest until we've gotten there."

Refocusing The National Agenda

If Obama had his way, he would have been paying more public attention to jobs long ago. But events kept getting in the way. The opening days of the president's new year were consumed by questions about the failed terrorist attack on Christmas Day. And talks about health care legislation — which Obama once hoped to finish last summer — dragged on.

If last week's Massachusetts vote didn't sound the death knell for health care legislation, it did at least signal a time out. Delaware Gov. Jack Markell, who chairs the Democratic Governors Association, says Obama now has no choice but to focus on the jobs message.

"Even before Massachusetts, everybody was on alert that the voters are looking for solutions," Markell says. "And that's exactly what we've got to provide. ... There's a burden of proof, particularly among independent voters. And that's why we've got to prove that we've got the right ideas to put people back to work in our states."

Long Way To Go

Markell says the Obama administration deserves some credit for helping to arrest the economic free fall. But he says there's a lot more work to be done.

"We're not out of the woods," Markell says. "And though we get reports from economists and the like, the best information I get is from business people on the street here in Delaware. And there's a long way to go before businesses are more confident. But we're certainly moving in that direction — as opposed to where we were a year ago."

Although the government's $787 billion economic stimulus package has helped cushion the recession, unemployment still hovers at 10 percent. Obama has proposed more road and bridge building, incentives for home energy retrofits, and a jobs tax credit. White House economic adviser Christina Romer says the tax credit is designed to encourage more small businesses to hire.

"These are businesses that are probably saying, 'I'm seeing demand start to come back. Maybe a year from now, I'll start doing some hiring,' " Romer says. "If we gave them some tax incentives, might they say, 'I was going to hire in 2011. Let me hire in 2010'? We know that would be good for them, good for the economy, good for workers that get jobs."

Making Other Issues Fit The Theme

As Obama underscores the jobs message Wednesday night, he'll also try to explain how other initiatives such as financial reform or clean energy legislation fit into a broader economic picture. White House spokesman Robert Gibbs says even the long-running health care battle was ultimately about protecting workers' economic security.

"I don't believe the president thinks we should stop fighting for what's important to the middle class," Gibbs says. "No doubt there will be calls to abandon financial reform. [There will] be calls by some to abandon wanting taxpayers to be paid back for their loans to Wall Street. I don't think the president would agree with those."

Greenstein says if Obama succeeds in addressing voters' economic worries, many of their other doubts about the president may disappear. Over the weekend, Obama took time out from working on the speech to play basketball with his two daughters. Greenstein says the president needs a rhetorical slam-dunk Wednesday night.

"He's famous for rising to the challenge and doing well in the clutch and so on," Greenstein says. "He seems to almost need that added adrenaline to do his best."

If challenges add adrenaline, Obama should have all he can handle Wednesday night.

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