ARI SHAPIRO, host:
And moving from cars to homes, despite all the government efforts to help the housing market, things still look shaky. A quarter of Americans with a mortgage owe more than the house is worth. Foreclosures remain at record highs, and fewer homes are being built.
All this leads economists to conclude that the Obama administration has some stark choices to make about housing, as NPR's Chris Arnold reports.
CHRIS ARNOLD: Analysts tracking the housing market right now you could put into two camps. Some say the government has done too much already. If prices want to fall further, they say, we should just back away and let them fall and be done with it. But a number of other prominent economists - both liberals and conservatives - are saying just the opposite. They think we need bolder action than anything the government or the banks have done so far.
Professor WILLIAM WHEATON (Massachusetts Institute of Technology, Center for Real Estate): So we'll start off and think about the role of real estate in the economy.
ARNOLD: Professor William Wheaton is teaching in a packed lecture hall at MIT's Center for Real Estate.
Prof. WHEATON: Construction is so far in the trench that it's only two percent of GDP right now. Its normal level in the United States is about six percent of GDP.
ARNOLD: Wheaton explains that the housing market is very woven into the fabric of the economy. The housing crash means construction layoffs, less consumer spending, of course, huge losses for banks. And Wheaton says all these homeowners who are underwater, owing more than their house is worth, he thinks a lot more of them will start walking away from their homes. That would mean more foreclosures and even lower home prices.
Prof. WHEATON: If you're in a place like Arizona and you bought a house for 600 and now its worth 300 or 250 and somebody comes and says: You know, it's never going be back at 600, and there are neighbors down here right across the street from you who are buying the same house for, you know, 250 or $300,000 and their debt service is half of yours, that's pretty difficult to avoid walking from that situation.
ARNOLD: So here's Wheaton's proposal: He wants lenders to cut the amount that people owe to the value of their house so that they're not underwater anymore. But in exchange, the homeowner would have to give up half of the gains if the house appreciates in value. So, if in five years they sell the house for a profit, they then have to split that gain with the lender.
And right now there are many other proposals. One that's getting a lot of attention calls for a staggeringly large government refinancing program. This proposal comes from two economists at Columbia University: Glen Hubbard, who headed up President George W. Bush's economic team, and his fellow economist, Chris Mayer.
Mr. CHRIS MAYER (Economist, Author): If we had normally functioning markets, we would already have seen, you know, 30 million people taking out new mortgages.
ARNOLD: That's because interest rates have recently been extremely low, and borrowers who can qualify can save hundreds of dollars a month. But the problem is that there are many borrowers who can't qualify. Home prices are down, lending standards are tighter, so...
Mr. MAYER: We are calling for the government to reach out to 37 million borrowers and offer to refinance their mortgages.
ARNOLD: Mayer says it makes sense to do something like that because the government is already on the hook for those mortgages. It guarantees them through the mortgage giants Fannie Mae and Freddie Mac, or in other ways.
Mr. MAYER: The government originates more than 19 out of every 20 mortgages. So the government is the market.
ARNOLD: So Mayer and Hubbard say: Why not refinance these people who can't qualify? They'll be better able to pay their mortgages, less likely to default and cost the government money, and to boot, you'd be putting more money in millions of people's pockets for them to go out and spend and stimulate the economy. But let's hear part of that last quote one more time.
Mr. MAYER: The government is the market.
ARNOLD: As you might guess, that makes some economists' hair stand on end.
Professor ANTHONY SANDERS (Finance, George Mason University): If this doesn't even terrify the most hardened person out there, I don't know what does.
ARNOLD: Anthony Sanders is a real estate finance professor at George Mason University. He says the government's earlier efforts to prop up the market have already resulted in them essentially taking over the market, guaranteeing almost all those new home loans.
Prof. SANDERS: This is the byproduct of government intervention. When they intervene, good luck getting them out of there. When does this stop?
ARNOLD: Sanders is basically worried about unintended consequences. Maybe these proposals would result in more losses for banks or pension funds, which wouldn't be getting those higher interest rate payments from homeowners. And Sanders just thinks it's time for the government to back away from interventions and to allow the market to start charting its own course.
Chris Arnold, NPR News, Boston.
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