As Housing Goes, So Goes the Economy
Published: May 24, 2011
The Great Recession began with the bursting of the housing bubble. Today, nearly two years after the recession officially ended, the housing market is still in trouble.
At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.
Even a recent drop in foreclosure filings isn’t a reason for optimism. April was the seventh straight decline in monthly filings — which include notices of default, auction and bank repossessions — according to RealtyTrac, a real estate data provider. But the decline appears to be largely the result of banks slowing the foreclosure process in order to keep properties off the market until prices recover. The catch is that prices are unlikely to recover as long as millions of foreclosures are imminent.
This isn’t just bad news for homeowners. Selling and building of houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse.
Since the problems in housing are not self-curing, a government fix is in order. But the Obama administration’s main antiforeclosure effort has fallen far short of its goal to modify three million to four million troubled loans.
Its basic flaw is that participation by the banks is voluntary. Most have joined the program but face no real pressure to meet its goals. Another big problem is that banks often do not own the troubled loans; rather, they service the loans for investors who own them. As servicers — in charge of collecting payments and managing defaults — banks can make more from fees and charges on defaulted loans than on modifications. Not surprisingly, defaults proceed and modifications lag. Banks win. Homeowners and investors lose. The economy suffers.
That does not have to be the end of the story. In a recent hearing in a Senate banking subcommittee, witnesses proposed new laws and regulations to change loan-servicing standards in ways that would prevent banks from putting their interests above those of everyone else.
For starters, various government guidelines on loan servicing would be replaced with tough national standards. Among the new rules, homeowners would be evaluated for loan modifications before any foreclosure — or foreclosure-related fee — is initiated. The bank analysis used to approve or reject modifications would be standardized and public, and failure by the bank to offer a modification when the analysis indicates one is warranted would be grounds for blocking any attempt to foreclose.
National servicing standards could succeed where antiforeclosure programs have failed, namely, in compelling banks to help clean up the mess they did so much to create.
In the Senate, Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced bills to establish standards. The new Consumer Financial Protection Bureau can also impose servicing rules. The Obama administration should champion national standards, and Congress and regulators should act — soon.
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There have been positive signs of recovery in the American economy after the bursting of the housing bubble. Foreclosure rates which were soaring in 2008 have been relatively low. Employment rate is steadily rising. Now it is high time that the U.S administration completely fix the problem.
However, the path to recovery seems very rugged. The innate flaws in the American economy aren’t being fully addressed by the Obama administration. What’s more, investment credit on U.S is very shaky. Even when housing conditions improve just as explained in the article, without the support of other economic factors, sustainable recovery is unlikely. So what are the specific problems in the current status quo?
First, unemployment rate is still at an all time high. Analysts are cautious about the vibrant news reports about the possibility of quick recovery. They call the current situation of America as the ‘jobless recovery’. They worry the basis for recovery is too weak to sustain further economic growth or stability. It is good to hear that some of the major economic indicators such as GDP are improving. However, unemployment remains at 9% unlike the vow president Obama has made in the early 2011. Soaring unemployment rates will considerably reduce disposable incomes for consumers and thereby decrease spending and saving. Consumption and saving are major engines that drive the economy forward. Without those two components, it is unlikely for the U.S economy to have bright future.
Second, twin deficit is strangling the U.S economy. Budget issues at the federal level are also contributing to the slowdown of the economy. The Federal Reserve announced several months ago that it is going to focus more on fighting against inflation. Inevitably, large federal budget cuts have been made and they are choking the economy with no space for growth. Especially major government plans such as health care plan is expected to tighten the budget even more. Trade deficit is almost reaching $500 billion dollars. Trade especially with China and India are pushing widening the deficit and pushing down Treasury yields.
Third, the global economic situation is aggravating. The natural disaster in Japan is having bigger economic repercussions on the global oil and raw material prices than expected. The sovereign debt crisis in Greece is once again becoming a major tumor that has to be cut out immediately. The surging doubt and investor disbelief were the major factors that contributed to the fall of New York stock prices for five consecutive weeks.
So are there solutions to these problems? Is it impossible to resolve these issues? Absolutely, there are some ways to alleviate or even get rid of the problem in the status quo.
To begin with, hypocrisy in government policy should not be seen. Obama administration promised its citizens to push down the unemployment rate to a considerable level, giving hope to many of the people. However, not only was the policy ineffective but also contradictory. While private firms have added over 1.7million jobs in the past 12 months, the government has laid off nearly half a million over the same period. This kind of contradictory policy made it almost impossible for the policy to succeed. Unless the promises made match the real policies, tangible results will have no place to stand.
Moreover, the U.S administration should view the economy in a more long-term perspective. What I think is that the government is only focusing on myopic perspectives of the economy. I guess it is partly because of the upcoming election in 2012. He definitely needs populist policies to attract more voters. However, that is not the case for the current U.S economy. Resorting to extremely tight fiscal policies just for the sake of making consumers feel good due to lowered prices does more harm than good. They should try to fix the fundamental problems in the U.S economy throughout the long term. Heavy dependence on finance industries, extreme vulnerability on global markets, and high unemployment rates are the problems that the government should address. If they don’t prepare for the future now, it will be a total recipe for disaster in the days to come.
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