After sinking for six awful years, the U.S. housing market finally has bounced off the bedrock: Sales are up, prices have stabilized, more homeowners are keeping up with their mortgage payments. A huge weight on the economic recovery is slowly lifting.
In recent days, reports have shown home prices starting to rise. On Tuesday came news that the S&P/Case-Shiller home-price index climbed in July, the fourth straight monthly improvement. Prices in the Chicago area rose 2.7 percent in July, better than the 1.6 percent national gain. At the same time, homebuilders have announced stronger earnings based on increased demand for new housing.
There are a few reasons for this welcome news. Mortgage rates have been kept low by the U.S. Federal Reserve. The government continues to guarantee the majority of new mortgage loans through Fannie Mae and Freddie Mac. Banks have recapitalized so they can, in theory, lend again. The painful process of foreclosure has helped clear bad loans and whittle down the inventory of distressed homes hanging over the market. Rising rents make the purchase of real estate more attractive for investors. No coincidence, consumer confidence has reached a seven-month high, the Conference Board reported Tuesday.
Millions of Americans remain in housing purgatory. About 27 percent of mortgage balances exceed or nearly exceed the value of the property ― making them “underwater” in real estate terms. We haven’t forgotten those who still suffer in the aftermath of the real estate crash. For many, the modest uptick to date is too little too late.
But overall, there is improvement in the housing markets across the nation, and that comes as a tremendous relief. The effect on the broader economy stands to help everyone.
For many households, the home is the No. 1 source of wealth. When the value of homes goes down, people feel poorer. Naturally, they economize. They take fewer risks. Their reluctance to spend and invest translates into sluggish economic growth and persistent unemployment. A better real estate market won’t change their outlook entirely, but it will help. One of the key measures of household buying power, homeowners’ equity, has increased by hundreds of billions of dollars so far this year.
Housing is a direct source of jobs as well, obviously in the building trades but also in everything related ― from housewares manufacturing and appliance retailing to lawn services. Local governments depend on property taxes to support their services.
Flexibility is among the great strengths of the U.S. labor market. To make the most of it, workers need to be mobile. Americans have a long history of packing up and moving for better jobs. One insidious effect of the housing bust has been locking people in place. Those who owe more than they can afford to pay off have been stuck in their homes. With the real estate market improving, greener pastures beckon.
The better conditions give Americans the opportunity to decide what kind of housing market they want.
There’s already talk of the next housing bubble. Don’t scoff. As the market improves, this nation needs to protect itself by shifting away from the incentives that helped create the real estate boom-and-bust that trapped and hurt so many families.
We’d like to think that hard lessons were learned. That too-easy credit will be a thing of the past. That “we’re-blowing-them-out” sales pitches will fall on deaf ears. That houses never again will be used as tax-advantaged cash machines.
As a nation, however, we’re not there yet. With the housing market out of the woods, it is time to ensure that government policy encourages responsible home ownership instead of another real estate craze.
Bad mortgages triggered a financial panic that required massive government intervention and brought about the worst recession in decades. The financial system will be operating under extensive new regulations intended to head off a repeat performance. Yet at the individual level, Americans still are being encouraged to sink too much of their wealth into housing.
The biggest culprit: the tax code.
Mortgage interest and property tax deductions, along with a break on capital gains, amount to huge subsidies for home ownership, far beyond what’s needed to encourage first-time buyers or help lower-income Americans make purchases or persuade wealthier folks to take out $1 million mortgage loans on McMansions. Yet that is precisely what happens, especially through the mortgage interest deduction. This page has advocated for tax reform as part of a broad-based deficit and debt reduction program. Lower income tax rates and scale back the deductions that skew economic activity.
A housing recovery will go a long way toward restoring the nation’s fiscal health. As we recover, we need to make some decisions that allow the housing market to rise on a strong, sustainable foundation.
