Housing Prices To Continue Dropping Home prices were at a record high two years ago, but prices have since plummeted. Analysts predict the housing market could see an even sharper drop in prices as the industry attempts to stabilize. Harvard professor William Apgar, also a former Assistant Secretary of Housing at the U.S. Department of Housing and Urban Development, and money coach Alvin Hall offer tips for both current homeowners and prospective buyers.

Housing Prices To Continue Dropping

Housing Prices To Continue Dropping

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Home prices were at a record high two years ago, but prices have since plummeted. Analysts predict the housing market could see an even sharper drop in prices as the industry attempts to stabilize. Harvard professor William Apgar, also a former Assistant Secretary of Housing at the U.S. Department of Housing and Urban Development, and money coach Alvin Hall offer tips for both current homeowners and prospective buyers.

MICHEL MARTIN, host:

This is Tell Me More from NPR News. I'm Michel Martin. Coming up, fewer people are being diagnosed with and dying from colorectal cancer. That's the good news. But blacks are still more likely to die from the disease than whites, and the gap is actually growing. We're going to ask why in just a few minutes.

But first, more on the country's economic troubles. Home prices were at a record high just two years ago. Since then, prices have plummeted, leaving many Americans owning homes that are worth far less than what they paid for them. And some analysts say prices may drop even further before returning to previous levels. With us now to shed some light on this is William Apgar. He's a professor at the Harvard Kennedy School of Government. He's a former assistant secretary at the U.S. Department of Housing and Urban Development. Also with us, Alvin Hall, our regular contributor, our money coach. Welcome to you both. Thanks for speaking with us.

Professor WILLIAM APGAR (Public Policy, Harvard Kennedy School of Government; Former Assistant Secretary, U.S. Department of Housing and Urban Development): Hello.

ALVIN HALL: Glad to be here, Michel, even with a cold today.

MARTIN: Oh, well, we appreciate it. Alvin, let me start with you. As I said, that home prices have fallen something like 19 percent across the country since they peaked in the spring of 2006. Why is this happening?

HALL: First, there was a huge oversupply of building going on in California, Nevada, and Florida, and people assumed that there would be all these people out there to buy this housing, and that was simply not true. Also, people had become very skillful in marketing these houses. In places like Florida and Las Vegas, they would have these huge events surrounding the opening of this new building and these apartments and condos, starting out at $2 and $3 million, and people would jump on them.

Then, the housing bubble burst. And all of a sudden, in addition to all of these people who had bought these new properties, there were all these individuals with properties that were flooding the market, that they wanted to sell. And they were willing to sell them at fire-sale prices to get out of the market. But the next contributing factor was the number of adjustable-rate mortgages. When the adjustable-rate mortgages began to reset, they couldn't afford the payments. And therefore another wave of houses were put on the market, again at fire sale prices. All of the pressure was downward, driving housing prices lower and lower and lower.

MARTIN: So, Professor Apgar, let's look at it from the other direction. A recent U.S.A. Today analysis of home prices since 1950 said that home prices would have to drop another 17 percent before they could reach, quote, "traditional relationship to household income." What does that mean? What is the traditional relationship to household income pricing, and why did prices get so high?

Prof. APGAR: Well, you know, a lot of people want to be homeowners. It provides them security, ultimately, and that takes in retirement and all those good things. But a lot of that got a little bit out of control. Because, among other things, it was difficult to build new units in many communities because the land used in zoning constraints - homes were bigger and better, and so they were able to command a better market price - house prices started to go up.

And then there set in the elements of the bubble that were spoken about earlier. And those elements were - people began to believe that an investment in a house had to be paid up. They started talking about the fact that I'm going to buy a bigger home because it's going to increase in value and make more money. And so, once the homeowners began to think in these speculative fashions, they preceded to continue to press into the market, even though house prices was rising well above what had been traditional income-to-value relationships.

And the enabling factor, of course, of all that was easy money. It didn't take much income to qualify for a relatively large loan. Lenders allowed folks to come in with zero down, zero cash, zero interest payment, and all that enabled folks - who ought to have been squeezed out of the market by traditional constraints, in terms of ability to pay - just allowed them in until we got into this frenzy where, in many market areas, people were paying five, six times their income in situations where a ratio of three might have been more common between house value and income.

MARTIN: Here's what I don't understand. As Alvin described it, there was just a lot of - I think what we would now call overbuilding...

Prof. APGAR: Yup.

MARTIN: In a lot of areas. And there was also easy credit. So, that seems to me that would push prices downward, Professor Apgar. Why didn't it - it's worked that way right now, in this very short period of time. But why didn't all of that provide a check on home prices up to this point?

Prof. APGAR: Well, builders of course, being folks who are able to qualify for mortgages, are hungry for ownership, wanting to get in. They continue to ramp up their plans to build. And the problem, of course, is the building process is a somewhat slow process. So, while builders should have been rightfully cutting back, you know, in 2005, 2006, they were going full steam ahead. And then, all of a sudden, it got to where people couldn't qualify anymore, and the buyers began to evaporate, but the homes kept rolling off the production line so to speak, producing this enormous overbuilding that put the downward pressure like was described earlier.

Then the financing, of course, got tougher as lenders began to realize that many of their loans to borrowers were unsustainable, and so the easy finance went away. And then we, of course more recently, have the weak economy that's adding the downward pressure, and the foreclosures coming out. And so, it's just a classic case of overshooting the mark, as often happens. In this instance the homebuilding industry overshot by a lot.

MARTIN: Is this a problem nationally, Professor Apgar? Is this really something that varies from market to market?

Prof. APGAR: It is a problem nationally because, of course, there are so many foreclosures that it's affecting broad credit markets that affect all aspects of American economy. But in terms of the housing side, obviously, it's very intense to states that were named - Florida, Nevada, California and the like. But there are few states that are completely immune from falling house prices. They are falling dramatically. And what contributed to that is, even people who weren't hit by the foreclosure problem, even people that aren't hit by the soft market, are saying, well, maybe now is not a good time to buy. And so, the demand is really pulling back because people are just nervous about the economy, and nervous about home prices.

MARTIN: Is this, Alvin, the kind of thing where - we've talked about this before, that what may be best for you as an individual is not what's best for the economy overall?

HALL: Absolutely.

MARTIN: As an individual, it's better for people to be as conservative as possible, to stop using home equity lines for consumer consumption, for example, to hunker down and wait to see what happens, but the economy needs people to get back out there and buy. What's the answer to this?

HALL: Yes. Well, there is no perfect answer. When you hear the politicians talk about this and say, we want to stimulate people to go out and buy properties so that the value of the homes will be sustained and start to rise again, that will build confidence. But at the same time, individuals have to look at their financial reserves, how much money they have, and to see whether they can afford to take the risk of buying the property. So, getting the balance right is very difficult for the government. And by focusing on house prices, I think the government is doing the right thing. But they need to combine that with job security. Because no matter what house prices fall to, if people do not feel secure about their income and their jobs, they're not going to buy a house.

MARTIN: Professor Apgar, we just have a minute or so left. What do you think as - just, as I was discussing with Alvin, the individual consumers being rational and saying I, you know, I need to wait and see what happens before I get involved in this rollercoaster. But the economy needs people to go out and buy, and sort of stabilize it. What do you recommend? What do you think is an appropriate course of action for the government to take?

Prof. APGAR: Well, everyone has to do what's best for them, and that's particularly in a local situation. But you know what consumers can do, of course, is watch. Because there are starting to be some bargains out there, and they have to make the calculation, especially people who don't own a house now. I mean, one of the big engines of recovery is the fact that, every year, there's a million, 500 kinds of new households because kids graduated from college, they have jobs. Maybe not as rosy as two years ago, but they have good income. And for them the question is, when is the right time to enter the market? The problem, of course, is knowing when the market's hit the bottom. There will be a time in which this market will hit bottom and there could be quite a nice recovery.

MARTIN: And finally, Professor, President-elect Barack Obama has just named his choice for Housing secretary. Should he be confirmed? What do you think his first priority should be?

Prof. APGAR: Well, I think for housing, dealing with this foreclosure issue and dealing with the home price issue is job number one. And HUD of course has a big role because of its presence through its engagement in communities across the country, and working on that neighborhood-by-neighborhood, block-by-block kind of programmatic response.

MARTIN: Alvin, what do you say to that?

HALL: My thinking is the government needs to draw a clear distinction between primary mortgages, the mortgages that people own on a house where they still live, and all these speculative mortgages. Like the lady featured on "60 Minutes" this week, who had six different properties out there. But when it's somebody's primary residence, then I think the government needs to step in and stabilize the foreclosures on those. I think that when somebody has been out there buying multiple properties, hopefully trying to become a rental landlord, they live with the consequences of their actions.

MARTIN: Financial expert Alvin Hall is Tell Me More's money coach. He joined us from New York. William Apgar is a professor at Harvard's Kennedy School of Government. He's also a former assistant secretary at the U.S. Department of Housing and Urban Development. He was kind enough to join us from his home in Newton, Massachusetts. Gentlemen, thank you both so much for speaking with us.

HALL: Thank you.

Prof. APGAR: Thank you.

MARTIN: Now, you know that at Tell Me More the conversation never ends. You just heard from our experts about the housing market. Now, we'd like to hear from you. How have falling home prices affected you? Have they affected the community where you live? Are you a prospective home buyer who's out looking for bargains? Are you staying in a home that you want to sell, but can't? And even if you plan to stay in your house, has the drop in home values caused you to rethink your finances? To tell us more, visit our website at the Tell Me More page, at npr.org. Or you can call our comment line at 202-842-3522. That number again is 202-842-3522. Please remember to tell us your name and where you live.

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