You didn’t think you were going to get off that easy, did you America?
The housing market has made huge strides in recent years–Core Logic, for instance, reported Tuesday that home prices increased by 10.5% year-over-year in April, marking the 26th straight month of price gains. But while it’s generally better to see rising home prices than the opposite, the rapid rise in values has masked problems in both the real estate market and the economy.
After all, another way of saying that home values are high is that the cost of housing is high, and normally we don’t like to celebrate the expensiveness of staple goods. It would be one thing if home prices were rising fast because the economy was booming and home builders just couldn’t keep up. But that’s not the case. In fact, construction spending has been flat, and single-family housing starts remain well below their pre-crisis norms.
What has really been driving the appreciation of home prices more than anything else is a lack of supply. Check out the chart below from Calculated Risk, which shows how the supply of homes on the market has deteriorated in recent years.
As you can see, inventory tends to peak during the spring and summer months. However, when the housing recovery began in earnest in the spring of 2012, the market bucked that trend, with inventory falling precipitously. And though it appears that 2013 will be the “bottom” in terms of housing inventory, the number of homes for sale is far below what you would expect in a normal market.
What’s behind these dynamics? A few things: For one, many homeowners and home-owning institutions have kept their property off the market in hopes of higher prices in the future. But the large number of homes that remain underwater have also contributed to the problem. A study released last month by online real estate data company Zillow estimated that 10 million Americans–or 18.8% with home loans–owe more on their homes than they are worth.
Those folks are often unable to put their homes on the market because of penalties or other restrictions against short sales. What’s worse is that these properties are often concentrated in a few hard-hit cities and regions. Peter Drier, director of the Urban and Environmental Policy Institute at Occidental College, points out that one in 10 Americans live in one of the 100 cities hardest hit by the foreclosure crisis, places where 22% to 56% of homeowners are underwater.
These cities and neighborhoods are not experiencing any kind of housing recovery, and in the absence of a concerted effort by the federal government to help them, state and local governments have been stepping up. The latest example is Massachusetts Attorney General Martha Coakley’s decision to sue the Federal Housing Finance Administration (FHFA) as well as Fannie Mae and Freddie Mac, the housing finance companies that the FHFA oversees.
Massachusetts’ suit, filed Monday in Suffolk Superior Court, alleges that the FHFA has refused to sell mortgages it owns to the nonprofit organization Boston Community Capital (BCC). BCC seeks to buy foreclosed or nearly foreclosed homes and then sell them back to the homeowner at a fair market value, helping to keep families in their homes and restoring a sense of ownership within the community. This surely helps the homeowners, but it also makes sense for lenders and the wider community who get to avoid the costly and drawn-out process of vacancy and resale. According to Elyse D. Cherry, CEO of BCC, “It’s a good idea for everybody. It’s more effective for lenders to sell to us, especially because we’re cash buyers.”
But, according to Cherry, the FHFA has a policy of refusing to engage with organizations that sell foreclosed properties back to the former homeowners, which constitutes a violation of a 2012 Massachusetts law passed to help ease the state’s foreclosure problems. Cherry gives the example of a home in Dorchester that her organization tried to buy from Freddie Mac for a fair market value of $115,000. The BCC had agreed to the deal with the organization that had foreclosed on the property on behalf of Freddie Mac. But when Freddie Mac got wind that BCC was the buyer and was going to sell the property back to the former homeowner, it would only agree to sell it to BCC for the full amount due at the time of the foreclosure, roughly $300,000. A spokesman from the FHFA declined to comment on the suit.
Basically, the BCC is acting as a private facilitator for a mortgage principal reduction program. Principal reduction aims to help both the borrower and lender by lowering the total amount owed, helping avoid costly foreclosure processes and keep people in their homes. Private lenders like Ocwen financial have had some success adjusting borrowers’ mortgages with this process, but the FHFA has so far refused to even experiment with reducing mortgage principals.
It’s difficult to say exactly what effect a change in policy from the FHFA would have on the foreclosure market. But given that Fannie and Freddie own or guarantee more than half of the mortgages in the U.S., the potential is huge. Ethan Handleman, vice president at the Center for Housing Policy, argues that a widespread program of principal reduction could be a win-win for taxpayers–who stand behind Fannie and Freddie’s portfolio of homes–and homeowners, communities, and general economy. “A housing bubble is the result of lenders lending too much and borrowers borrowing too much,” he says, “but all of the pain is landing on the borrower.”