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Can Government Fix The Struggling Housing Market?

Published January 27, 2010 at 3:00 PM EST

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. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.