“Let me review briefly how we got here.
As the decade started, incomes were rising and interest rates were low and stable. Demand for homes outpaced supply, driving a sustained boom in home prices. Affordability plummeted.
Nevertheless, first-time homebuyers scrambled to get in, spending more and more of their income to purchase homes. The mortgage market, being efficient and responsive, offered new loan products with features that lowered initial monthly payments – teaser-rates, interest-only, negative amortization, and the like.
These products shifted more risk to consumers. But demand continued to spiral prices upward. Credit underwriters kept underwriting, and all bets were covered by the upward march of home values. Homeowners took out a steady stream of cash – nearly two trillion dollars since 2003 – by refinancing or borrowing against the value of their rising equity.
The homebuilding market – also being efficient and responsive – built a record 7 million new single-family homes during this period, boosting supply significantly.
Then, cracks started showing in the market. Inventories of unsold homes began to grow. Some of those new mortgage features expired and consumers – particularly at the lower end of the credit spectrum – started to struggle as their monthly payments jumped up…
However, the duration of housing’s drag on GDP can be shortened or lengthened, depending on whether the industry, policymakers, and regulators come together to make the right choices.
Having studied past dislocations in Texas, California, Asia, in the 1970s, it is clear that there is no single magic bullet. Multiple parties will have to take multiple steps over time to restore confidence. The most effective steps, historically, are solutions that buy time to restore normal housing supply and demand, solutions that have broad political support, and solutions that take a hard, realistic stance to “getting it over with” – rather than just nickel-and-diming the problem.
With that in mind, there are two broad policy areas to focus on here, and I think it is extremely important to keep them un-muddled.
First, there are immediate actions to make housing’s drag on the economy short and shallow. Second, there are longer-term reforms that take the lessons of this crisis to heart and buttress the future strength of the housing industry.”