A Swing To The Other Extreme Strangles Housing

Another sign of the weak economy came earlier this week when figures were released showing that sales of existing homes were down 27 percent in July. It's the result of a collision of factors that have all but ground the housing market to a halt. Host Scott Simon talks to Joe Nocera of The New York Times about the factors that have contributed to the dismal housing market.

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SCOTT SIMON, host:

Another sign of the weak economy came earlier this week when figures were released showing that sales of existing homes were down 27 percent in July. It's a result of a collision of factors that have all but ground the housing market to a halt. Our friend from the business world, Joe Nocera, joins us from member station WLIU in Southampton, New York. Welcome back, Joe.

Mr. JOE NOCERA (New York Times): Thanks, Scott. It's good to be back.

SIMON: And in a nutshell, why such a sharp drop in the housing market?

Mr. NOCERA: Nobody's buying homes, Scott.

(Soundbite of laughter)

SIMON: I believe I said that. Now, is this...

Mr. NOCERA: Yes.

SIMON: ...I mean, what, so the tax credit for new homebuyers expired.

Mr. NOCERA: It expired at the end of the June, and that's the reason for this initial very, very sharp drop. I mean, 27 percent is huge, and it would mean annualized home sales of less than 3.9 million, which is shockingly low in a country where five and six million is the norm.

Why is it happening? You know, a large part of the reason it's happening is because people are scared because they don't know where the end is. They don't know if they buy a house if the price will continue to fall. And people want to see some increase in value in their home.

And the second reason is because credit is unbelievably tight. Even people who could have easily gotten a mortgage a decade ago before the craziness of the bubble years can't get credit.

SIMON: But let me point out: Weren't the American people clamoring for tighter lending rules just 18 months ago, saying, you know, this is the problem, too many people who shouldn't be buying homes?

Mr. NOCERA: And that is quite true. There were too many people who were buying homes. The home ownership rate almost hit 70 percent, which is a historic high during the bubble years. Now it's heading back down towards 65 percent, which is a little below norm.

The pendulum has swung too far. It swung too far in terms of loose standards in 2006, 2007, 2005, and now it has swung so far the other way that it is a slightly crazy overreaction.

SIMON: How much of this decrease in home sales is due to the fact that with an unemployment rate of almost 10 percent people must fear that they're going to buy a home and lose their job?

Mr. NOCERA: Quite a bit, I think. I talked to some mortgage lenders this week, Scott, who really made a direct correlation between unemployment and the housing market. And they basically said even people who have jobs, they're worried that the job will be gone. And even the chief economist for the National Association of Realtors, who puts out these numbers and then tries to gloss over them, basically said a lot of the housing rebound is very dependent on whether the jobs come back.

SIMON: He also said, in a statement you thoughtfully provided to us, that he thought, you know, on the other hand, the interest rates are low and there are good deals on homes. Should that count for something?

Mr. NOCERA: No, not right now. The government is keeping mortgage interests at virtually historic lows, and there are good deals out there. But nobody wants to get these good deals because they're worried that we haven't hit bottom. And until there's a sense that housing prices have bottomed out, people are just not willing to buy a home. And who would be? If the equity in your home decreases, if the value of the home decreases, that's not a very good buy.

SIMON: What do you see as possibly reigniting the housing market?

Mr. NOCERA: I think the most important thing, believe it or not, is for the government to loosen its standards a little. You cannot get a mortgage in this country if Fannie and Freddie - Fannie Mae and Freddie Mac - or the FHA don't agree to guarantee it. That is the essence of the mortgage market right now, because the private market is too scared to do anything without government guarantees.

So, a lot of the reason people can't get credit and can't buy homes is because Fannie and Freddie's criteria are so tight. Now, some of this tightening was necessary but some of it clearly is an overreaction. And really, the way to get the housing market back on its feet again is for Fannie and Freddie to recalibrate, to loosen a little bit, and to make it possible for more people to buy homes. It's really pretty simple.

SIMON: Joe Nocera writes the Talking Business column for the New York Times. Thanks for being with us.

Mr. NOCERA: Thanks for having me, Scott.

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