Housing Crisis

Some are questioning whether the US is in a recession. Job losses last week were less than expected at -20,000. Many expected between -75,000 and -80,000. The stock market has rallied and the Dow Jones Industrial Average broke through the 13,000 mark last week. The Federal Reserve cut interest rates by 25bp but two members of the FOMC dissented. Richard Fisher, president of the Dallas Fed, and Charles Plosser, president of the Philadelphia Fed, argued there was no need for a cut. Despite a blip of positive news, the prospects for the U.S. housing market and American consumer are likely to continue to drag on the economy. For a graphic representation of how damaged the US housing market is, see Ben S. Bernanke's Mortgage Delinquencies and Foreclosures.

Snapshot asks, if this recession is led by falling housing prices and damaged consumers, when will it be worst?

The Conference Board's consumer confidence index fell again to 62.3 from 65.9 in March. The index was dragged down by the present situation index, which measures consumers' assessment of current economic conditions. Housing data also weighed on the economic outlook. Home prices from the largest urban areas around the country fell 13.6% in February from prices a year earlier. Given the slowing consumer and the rapidly declining housing prices, economists fear a "negative feedback loop," in which consumers, hurt by deteriorating house prices and poor consumer credit conditions, buy less and damage corporate profits.

Snapshot asks, will the struggling consumer keep the U.S. in a prolonged recession?

With a sense of irony and amazement that Congress actually might be getting the housing mess right, Sebastian Mallaby's column in today's Washington Post hits the nail on the head. It's interesting that it took a writer whose major beat is international economics to see the point about negative externalities and the collective public good. As several of us, through many forums--I've been working with the Center for American Progress on the Save America's Family Equity or SAFE proposal--have been saying for months, this is not a matter of bailing out either borrowers or lenders or of preventing house prices from falling. This is a matter of cushioning the blow for all the rest of us--the communities that will pay dearly from declining tax revenues and increased demand for services; the homeowners whose mortgages are long-since paid off or who have been paying faithfully and can and will continue to do so; the renters who have lost their homes because their landlord can't afford to pay the mortgage any more.

Mallaby points to the positive steps Congress is taking to enable loan servicers to sell or refinance their loans after taking a substantial haircut and to enable borrowers to get new loans that they can support--with upside to the government to compensate for taking the risk. I wish he'd included the proposal outlined in Congressman Frank's bill for bulk transfers of loans, because I believe that ultimately that will be necessary. But the essential points are there. As is the point that the tax giveaways in the Senate's "housing" bill are outrageous.