Economists Discuss Integral Importance of Housing Market to Economy, along with President Obama's Stimulus Plan

Several economists took time out this week to participate in a call moderated by the Fix Housing First Coalition about the state of the current economy, the housing market and the stimulus package that has been proposed by President Obama. (CLICK HERE for related story about Fix Housing First.)

Dwight Jaffee of the University of California at Berkeley's Haas School of Business, David Lereah, president of Reecon Advisers and former chief economist for the National Association of Realtors, and David Crowe, chief economist for the National Association of Home Builders, all spoke, and all agreed on one thing: the housing market needs to be fixed if the economy is going to be revived. They also agreed that the current stimulus package under review doesn't address this need.

"Something is sorely missing in this stimulus package and it's the housing sector," Crowe said.

He added, "It was the housing bust that was the primary cause of the current recession, and you need to treat the cause in order to recover from a recession."

Crowe advocates an increase in the first-time homebuyer tax credit (currently, it's $7,500 and has to be re-paid), a removal of the repayment requirement, and a structural change that allows the tax credit to be provided at closing, so that it can be used as a downpayment on a home.

Crowe also pointed out that while interest rates have been reduced, the strict mortgage requirements aren't allowing buyers to take advantage of them.

"The biggest problem I see is that buyers are not taking advantage of low mortgage rates because a 20 percent down payment is needed," Crowe said.

Crowe said he believes that if the supply of homes is reduced, the demand for homes will stimulate the housing market, which will help the economy recover.

Jaffee agreed.

"I do believe that a strong and direct stimulus to housing demand is absolutely essential," he said.

Jaffee also noted that stopping foreclosures from occurring (or at least reducing the rate) is essential-but pointed out the problems with this strategy.

"The first [problem] is that many of these loans have second liens, and they have second mortgages associated with them … It becomes a showstopper," Jaffee said. "The second one is that many of these borrowers don't have the creditworthiness to take out a new, modified loan."

But, he insisted, if this does happen, it could have monumental effects on the nation as a whole.

"Once you get home sales going, you get huge multipliers in the economy," he said. "People do all kinds of modifications when they buy a home … You get employment going in the housing markets and home sale markets--it's just a complete win."

He added, "We've seen it in almost every economy that housing leads the market out of the recession … but this is a particularly difficult problem because housing led us into the recession."

Jaffee predicted that if the Fix Housing First stimulus plan is added to the Obama plan, it could increase the country's gross domestic product by at least an additional 1 percent over the current plan, which, he said, would trickle down to consumers.

"We're talking about homeowner equity," he said. "The average homeowner [would] get an additional $25,000 in home equity."

Lereah discussed some of the nuts and bolts of what Fix Housing First suggests.

"[The tax credit] would only be available in 2009 and only to a person who buys a principal residence," he said. "The amount of the credit would be based on local mortgage limits. It would be somewhere between $10,000 and $25,000 and would not have to be repaid, unlike the current homebuyer tax credit … And, it could be used as a down payment."

He added, "Combined with that would be a buydown in interest rate. It would be a rate of 2.9 if the purchase were in the first half of 2009 and 3.9 if the purchase were made in the second part of 2009."

Currently, the Fix Housing First Coalition is focusing its efforts on talking with the Senate in an effort to get the revised tax credit measure into the current stimulus package.

The American Architectural Manufacturers Association is one industry group that has joined the coalition.

"A majority of AAMA members have been adversely impacted by the dismal drop-off in both new construction and remodeling activity during the past two years," says Rich Walker, AAMA president and CEO. "As the mortgage meltdown runs its course, a stimulus package is sorely needed to jumpstart both residential and commercial construction. Note that this is a stimulus and not a bailout. Once the industry is back on its feet and lenders are utilizing valid lending criteria, a full and rapid recovery is expected."

Need more info and analysis about the issues?
CLICK HERE to subscribe to DWM magazine.