Dean Baker: 'We’ve lost about $6 trillion in housing wealth, and I expect we will lose more.'
When I looked over the invitees to the Treasury Department's forum on housing policy today, I noticed one of the names that wasn't there: The Center for Economic and Policy Research's director, Dean Baker. Back in the early aughts, Baker was perhaps the most persistent and vocal voice warning of a housing bubble (see, for instance, this 2002 publication). Invitations get lost in the mail, of course, so I gave Baker a call to see what he thought of the housing market now, and going forward. A lightly edited transcript of our conversation follows.
How’s the housing market doing right now?
It’s softening big-time. The first-time buyer’s credit was extended, and it did have a big impact in boosting the market. Housing prices rose from the second half of 2009 till the expiration, then the extension of the credit gave a modest boost up until April 30. Then the market just fell out. Most of our data takes six weeks or two months to come back, so we don’t know exactly what the new contracts look like. But sales have dropped through the floor, so my expectation is that prices are falling sharply. We should see declines through 2010 and possibly into 2011.
How would you rate the administration’s housing policy response?
It’s been painful. There’s been no clear thinking about what they were trying to do. There was talk about supporting the market. But what’s the logic in supporting a bubble? There were markets where the bubble has fully deflated and maybe has gone too far. Places like Phoenix and Las Vegas. It would’ve made sense to support those markets. But we didn’t do that. We were indiscriminate with our policies.
Our housing intervention always seemed very small in comparison to our stimulus and financial market interventions. Was that part of the problem?
The amount of money was small, which may have been good because it’s not clear that what you should’ve been trying to do was support house prices. Supporting house prices would’ve taken a lot of money. It would’ve been like agriculture subsidies, but cost more and made less sense.
How much is weakness in the housing market doing to slow the recovery? At this point, is the economy as intertwined with the housing sector as it was a few years ago, or have they been more effectively cleaved from one another?
They’re tied up. The basic story is that the loss of demand in the economy has come first from lost construction, which is largely housing. That’s been about 3 to 3.5 percentage points of GDP. Then we had a bubble in nonresidential real estate, which was another 1 to 1.5 percentage points of GDP. Then on top of that, we had the consumption driven by housing wealth. The administration talks about consumers being pessimistic, but it’s not consumer attitudes that are the problem. It’s their wealth. We’ve lost about $6 trillion in housing wealth, and I expect we will lose more.
Are there any major policies you’d like to see us do to help the housing market in the short term?
To my mind, the best thing to do is help the homeowners who are losing their homes. The basic story there is to give them the right to rent their places for some period of time.
And how about the long term? How should our general approach to housing policy change?
First, we definitely did too much to promote home ownership. Even at the peak of the bubble, over 30 percent of households were renters. It just doesn’t make good sense to have a policy saying 30 percent of the country are second-class citizens. We should try to ensure people have good rental options.
In terms of ownership, I think it’s fine to help middle-income people buy homes, but the current structure is crazy. Most of the benefits go to higher-income people. If you go back to 2005, Bush’s tax commission actually had a very good proposal on housing: They proposed switching the mortgage tax deduction to a credit, and it would be capped at $450,000. Currently the cap is $950,000. That would orient it much more towards moderate-income people.
And then in terms of Fannie and Freddie, go back to the old model where you have them as government companies and they just hold the mortgages. They don’t securitize them. The government can bear the risk. But this will be difficult. First, there’s the ideological issue, and people say they don’t want the government doing more. Then there’s the political issue, which is that it’ll make the government’s debt look bigger. If you can’t get that, it probably makes the most sense to just do away with them. We don’t really need them. The market for “jumbo” mortgages -- mortgages bigger than Fannie and Freddie will take -- works reasonably well.
Photo credit: CEPR.
August 17, 2010; 3:36 PM ET
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