Realtors, builders say housing bust must run its course

By Peter Schroeder

Major players in the housing industry said Washington policymakers need to stop tinkering with the real estate market after a grim report Tuesday found prices have “double-dipped” to the lowest level since 2009. 

The latest report from the closely watched Standard & Poor’s/Case-Shiller index found that home prices tumbled 4.2 percent in the first quarter of 2011.

The bleak data led the creators of the index to declare that home prices have “double-dipped,” effectively erasing all the price gains made since the housing bubble burst two years ago. 

“This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. ... Home prices continue on their downward spiral, with no relief in sight,” said David M. Blitzer, chairman of the Index Committee at S&P Indices.

But despite the continuing struggles, housing advocates said they are not looking to Washington for policy fixes.

Some housing advocates argue that the efforts by lawmakers and regulators to prevent another financial crisis have gone too far, and are now actually weighing down the housing market and the broader economic recovery.

“We believe that until the housing sector starts to get better, the overall economy is going to encounter a series of fits and starts, and we will not see a robust recovery,” said Jerry Howard, chief executive of the National Association of Home Builders. “The pendulum has gone way too far.”

While policymakers in Washington are eager to find proof of further economic recovery, the housing market has proven to be a bearer of bad news. 

The latest home price data, coupled with disappointing reports last week on the nation’s gross domestic product and initial claims for unemployment benefits, has many wondering if the economic recovery is losing steam.

The economy is expected to play a major role in the 2012 election cycle and could be the deciding factor in President Obama’s bid for reelection.

But when it comes to policy prescriptions from Washington, many think the only cure is giving the market time to work through the wreckage left by the housing bust.

Walter Moloney, spokesman for the National Association of Realtors (NAR), said the housing market has been in a “broad trough” for the last three years. He also said NAR does not expect prices to begin to climb again for the rest of the year — primarily because of the high amount of bank foreclosures that started the housing crisis and still need to be sold off.

“We still have an elevated level of foreclosures in the market,” he said. “It’s going to take time to work it all through.”

An indicator released at the end of April made apparent how prominent a role foreclosures are now playing in the post-crisis housing market. The HousingPulse Distressed Property Index rose to 48.6 percent in March, indicating that almost half of all home sales are now distressed properties.

The many foreclosures in the housing market drag down prices, but are a necessary part of the recovery process, Moloney said.

“The good news is that those deeply discounted foreclosures are coming down the pipeline at a steady pace and selling quickly,” he said.

And while the creators of the Standard & Poor’s/Case-Shiller index say they see no end in sight for tumbling home prices, the Realtors association is more optimistic.

“We’re looking at a slow gradual increase, [but] the recovery is slower than it should be,” he said.

Lawmakers and regulators, working to prevent another crisis, are trying to prevent a repeat of the lax lending standards that drove the crisis while keeping credit accessible and affordable.

“It is, frankly, just simple stingy lending standards that’s holding back the recovery,” Moloney said. “You understand the hesitation … but both the housing boom and the correction have been aberrations.”

An example of that balancing act has been the push and pull between lawmakers and regulators about how a key provision of the Dodd-Frank financial reform law should be implemented.

That provision requires regulators to write rules requiring financial firms to hold on to some of the risk from mortgages packaged into bonds. Firms would have to hold onto 5 percent of the risk from mortgages, unless those mortgages met the new standards of a “qualified residential mortgage” (QRM). Under rules proposed by regulators in March, a QRM would be a mortgage with at least a 20 percent down payment, or one that is government-backed.

That definition led a bipartisan group of 40 senators, concerned about the accessibility of credit for potential homeowners, to tell regulators that the proposal went beyond their intentions.

“The extensive additional requirements for QRMs in the proposed rule swing the pendulum too far and reduce the availability of affordable mortgage capital for otherwise qualified consumers,” the senators wrote in a May 26 letter. “Sadly, in many cases, some creditworthy borrowers may not be able to get a mortgage at all.”

Howard said the letter was a step in the right direction, but that regulators also need to recognize that national standards cannot be applied to the wide variety of housing markets, and that tight lending standards have made a mortgage application “a mortgage Inquisition.”

Exacerbating the problem is ongoing talk of scrapping the mortgage interest tax deduction as part of a broad tax reform effort.

“They have the American public completely scared of housing,” Howard said.