WE SHOULDN’T count on the housing market to carry America back into economic uplands.
Last week, Federal Reserve Chairman Ben Bernanke sent a white paper to Congress outlining possible reforms to current housing policies. The paper proposes converting bank-owned properties into rental units and reducing borrowing costs for owners who are at risk of default. Some experimentation along these lines makes sense, but attempts to rejigger the market only go so far — and the barriers to success are high.
Bernanke’s frustration with housing is understandable. The seasonally adjusted Case-Shiller price data for October 2011 showed a decline from the previous month in 16 out of 20 markets, including Greater Boston. The housing market malaise weighs on the larger economy because low prices mean fewer construction jobs and because homeowners spend less when they feel less wealthy.
Yet while macroeconomic conditions might improve if the housing market perked up, it’s not obvious that the government should look for ways to artificially push up home prices.
Low housing prices means greater housing affordability, and current prices are closer to what market fundamentals would justify than the inflated prices of five years ago were. We overbuilt by nearly 3 million housing units during the boom, so we cannot avoid a painful period of limited construction that allows demand to catch up with supply.
The paper proposes converting bank-owned real estate into rental housing to reduce the stock of vacant homes.
Because the Federal Reserve knows the limits of government policy-making, it’s focusing its attention on two narrow problem areas: the large supply of vacant homes, and the ample number of owners potentially facing foreclosure.
The paper proposes converting bank-owned real estate into rental housing to reduce the stock of vacant homes. America does need to turn towards renting after an undue emphasis on owner occupancy. But our current vast supply of vacant housing was built to be owned, not rented, and conversion is quite difficult.
As landlords know, renting is a tricky business that is made easier with compact, ideally multi-family units – like Boston’s triple-deckers, unlike newly vacant homes built in exurbia. There is a close connection between housing type and ownership. More than 85 percent of single-family detached houses are owner-occupied, while more than 85 percent of units in large multi-family buildings are rented.
The Fed’s proposal may hold some promise in denser areas of Boston and adjacent cities and towns, but it quickly breaks down in more outlying areas. Renting single-family detached houses is difficult, because renters don’t have the right incentives to provide the sweat equity that homes need. Some estimates suggest that homes lose 1 percent of their value each year when rented, and those are homes selected for the rental market. Newly constructed exurban homes have far more potential downside, especially if they are hard for landlords to monitor.
Despite the dangers, I’d support a modest experimental rental program, if it can be done without subsidy. Maybe the government could run an auction, but sell only if rental companies exceed a certain price.
The Fed paper’s second primary proposal is to modify loans for owners who owe more on their mortgages than their homes are worth. Other programs have tried this already, with limited success, but the Fed suggests further steps to help homeowners, such as eliminating the refinancing fees that the government-controlled Fannie Mae and Freddie Mac charge in certain riskier situations. Freddie and Fannie might also refinance underwater loans made by private lenders.
While the Fed should want to help distressed borrowers, we should be wary of imposing more financial risks on Fannie and Freddie. Taxpayers are already out hundreds of billions of dollars because of past risky mortgages. I favor a simple cash payment of under $10,000 to ease the pain for foreclosed families; that form of aid provides humanitarian relief without keeping people in homes that they can’t afford.
Even if Fannie and Freddie modify many distressed loans, that won’t rekindle the housing market. Real housing prices did not rise between 1991 and 1998, when our economy roared after the last housing bust. We don’t need another new housing boom to bring America back.
Try BostonGlobe.com today and get two weeks FREE. Edward L. Glaeser, a professor of economics at Harvard University, is author of “The Triumph of the City.’’ His column appears regularly in the Globe.