President Obama’s proposal to expand access to mortgage refinancing has reignited a debate about the appropriate role for government in supporting the housing market. Some economists argue that the best way to spur the recovery is to stop intervening, let matters run their course, and allow home prices to normalize naturally.
The new initiative, briefly mentioned by the president in his jobs speechlast week, seeks to help homeowners to refinance their mortgages at lower interest rates with hopes to stimulate consumer spending and boost economic growth.
Anthony Sanders, professor of real estate finance at George Mason University, says it’s a mere extension of The Home Affordable Refinance Program, which has helped only a small number of homeowners. In his view, the initiative is unlikely to have any significant stimulative effect on the economy.
“At best, that plan will generate $90 billion in additional borrower income. But that is only one tenth of one percent of personal consumption expenditures,” Sanders told CNBC.
"Households will appreciate the additional $150-$300 per month, but those will be taken from pension funds and others who invested in Agency (Fannie, Freddie, FHA) mortgage-backed securities," adds Sanders.
In a recent working paper, Congressional Budget Office also expressed skepticism about potential benefits of a large-scale mortgage-refinancing program.
"Because the estimated gains and losses are small relative to the size of the housing market, the mortgage market, and the overall economy, the effects on those markets and the economy would be small as well," concluded the report.
Some argue that government efforts to help struggling homeowners would alleviate labor mobility, which has been hampered by the housing woes.
But Stijn van Nieuwerburgh, associate professor of finance at NYU Stern Business School, says labor mobility has not been a big issue. "All areas in the U.S. are affected, and it is not the case that there are abundant jobs anywhere."
A recent research fromChicago Federal Reservealso found no evidence that people’s reluctance to sell their homes in declining market to relocate for a new job has contributed to high unemployment.
Van Nieuwerburgh said the government's efforts to boost housing are instead prolonging the inevitable by keeping home prices artificially high, while it is lower prices that are really necessary to revitalize the housing market.
Sanders agrees: "Housing is still relatively expensive for Americans, especially with credit remaining scare. The only solution is to have lower housing prices".
He says home prices could fall another 10 percent if the government stops its various efforts, including the foreclosure moratorium and litigation against banks, which further disrupts the market.
"Continued government interference will lead to price declines as well as increased price volatility, as home buyers try to guess the next policy change," says Sanders.
Van Nieuwerburgh, who co-authored the book "Guaranteed to Fail", advocates gradually ending all government subsidies, including mortgage interest rate deductions and the wind down of Fannie Mae and Freddie Mac.
"There might be an additional price decline initially but eliminating the subsidies will put the U.S. economy ultimately on more solid footing," says van Nieuwerburgh.
Dean Baker, co-director of the Center for Economic and Policy Research, also believes that home prices should be allowed to fall and that artificially supporting them will create other problems for homeowners. "It's going to be a mixed picture in the short-term," said Baker. "When people lose housing wealth they will cut back consumption. But we don't want people to buy over-valued homes or to borrow against equity that will subsequently disappear."
Celia Chen, analyst at Moody’s Analytics, disagrees and says the government plays an important role. She cautions that if housing prices were to fall too quickly that could lead the economy back into recession.
"The housing market needs support from policymakers," says Chen. "Housing is at risk of falling back into the vicious cycle seen in the depths of the last recession. That cycle was broken only by unprecedented monetary and fiscal policy support."
Under the status quo, Chen expects home prices to fall by 5 percent this year and 1.7 percent next year.
David Restler, Chief Economist at Nomura Securities, says the best thing the government can do for the housing market is to simplify the cumbersome foreclosure process, which has resulted in glut of inventories.
"This foreclosure mess leaves valued assets in weak hands longer. What you need for recovery is to get assets in stronger hands," he said.
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