Housing industry problems dragging down economy

It barely rated a mention during either the president’s speech Thursday or the Republican candidates’ debate the previous night.

Yet the moribund housing industry — and the record number of foreclosures tied to it — have been critical factors in perpetuating this weak economy.

“Housing is the story,” said Dean Baker, co-director of the Center for Economic and Policy Research. “We lost 6 percent of the GDP and we need something to replace it, and we’ve got nothing to replace it.”

Housing prices have fallen nationally to 2003 levels. In Atlanta, homes have lost a decade of gains. That has left many homeowners “underwater” — owing more than their home is worth. Meanwhile, new construction has dwindled to a trickle.

About the only surge has been in foreclosures. The combination of subprime and other questionable mortgages, and massive layoffs left millions of homeowners unable to make their payments.

Many economists believe that a plan for recovery that doesn’t confront the housing crisis may be just tinkering around the edges.

The economy must grow at a pace of about 3.5 percent to lower the painfully high jobless rate — 9.1 percent nationally and 10.1 percent in Georgia. But since emerging from recession in 2009, expansion has been far weaker.

Housing’s drag guarantees that growth will stay anemic, said Mark Vitner, senior economist at Wells Fargo.

“Until housing begins to grow again, it will be very hard for the economy to grow faster than 2 percent for more than a quarter or two,” Vitner said.

The damage has been worse than average in metro Atlanta, which repeatedly led the nation in housing starts for more than a decade.

Tens of thousands of jobs vanished — some directly tied to housing, like builders, bricklayers, painters and brokers. But many others went away, too — real estate lawyers, accountants and workers in carpet factories.

And with the disappearance of each paycheck, so did some spending on clothes and jewelry and entertainment. The result: a hobbled local economy.

Housing woes hurt the economy in a number of ways:

• When people feel richer, they spend more money. That wealth effect is reversed when home prices fall and people feel poorer.
• Confidence also spurs spending. Confidence is contagious. So is fear.
• Many homeowners — even those with good jobs — are no longer able to use their home equity as a backstop against unexpected expenses.
• Borrowers who are underwater generally cannot refinance mortgages to lower rates.
• Many homeowners are unable to sell. That makes it hard to take a job elsewhere — that is, if one can be found.
• Economic mobility also is undermined by the crisis, according to a study by the Pew Center on the States. "Housing in and of itself is a real important asset, the largest asset held by many Americans," said Erin Currier, project manager for the study. "With housing's collapse, we are seeing a deterioration of assets, and that has long-run aspects in terms of people's mobility."
• Perhaps most critically, when the price keeps falling for resale of homes, there is little incentive to build new ones.

“New construction is at a 50-year low, and new construction is jobs,” said Steve Palm, president of Marietta-based SmartNumbers, a real estate research and consulting company.

Housing growth lines up with job growth. In the three years before the burst of the housing bubble, metro Atlanta added 165,200 jobs. In the three years after, the region lost 220,700 jobs.

Another way to look at it: Each housing start accounts for creation of roughly 2.5 jobs directly and at least one more job in indirect spending, said Vitner.

Metro Atlanta had been accustomed to construction of 50,000 homes a year, he said. “That’s almost 200,000 jobs that would be there. That’s how many jobs we are short.”

Nationally, housing starts before the boom ran at about 1.6 million a year, Vitner said. “So we are 1 million short — that’s 3.5 million jobs that do not exist because housing is as it is.”

What’s more, the market is unlikely to recover until foreclosures work their way through the system. That will take a while: More than 2 million homes are in the foreclosure process and nearly as many other mortgages are seriously delinquent, Vitner said.

More than $22.25 billion in mortgage loans have been foreclosed on in metro Atlanta since the end of 2007, Palm said.

In his high-profile speech on jobs, President Obama’s only reference to housing was to say that his administration would “work with federal housing agencies to help more people refinance their mortgages.”

The administration’s Home Affordable Modification Program was meant to help up to 4 million homeowners avoid foreclosure. It has assisted less than 750,000.

If housing is so important, why the lackluster response?

Politics is one answer. The government, Fannie Mae and Freddie Mac are partially blamed for the financial crisis that caused the recession in the first place. So, some believe, it doesn’t make sense to give them additional resources to right the ship.

Also, some solutions are inhibited by the sheer complexity of dealing with an intricate system that has several players — including sellers, buyers, brokers, lenders, Wall Street firms and investors in mortgage securities — with diverse interests.

What could be done, assuming it became politically feasible?

• Allow defaulting borrowers to stay in their homes as renters. Some have suggested having governments or public-private partnerships buy the property, while others say let the banks take ownership. Or Congress could pass a law requiring lenders to permit them to remain as renters.
• Require banks to accept refinancing of homes at lower interest rates, even if homeowners are underwater.
• Have federal agencies issue low-interest loans to homeowners that let them stay current on their mortgages.

“There will not be one solution to this problem,” Vitner said. “There will be a number of solutions. It will require some out-of-the-box thinking.”

Meanwhile, pessimists fret that housing has much more damage to do.

After overbuilding for years, the nation has roughly 2.5 million more homes than needed, said New Jersey-based economist A. Gary Shilling. At the rate that new households are being formed — and some new homes still being built — it will take about five years for the market to be back in balance.

Average home prices are down about 33 percent. With supply outstripping demand, home prices might fall 20 percent more to return the market to the pre-boom trend, he said.