RISMEDIA, Dec. 10, 2008-Although recent government efforts to improve America’s housing markets have proven less than effective so far, economist Dr. Mark Dotzour says bold government action can get the market back on track.
In his new white paper, the chief economist for the Real Estate Center at Texas A&M University offers a four-part solution to fixing the housing crisis, one that involves more than simply devising ways to keep people in their homes.
“The housing problem is fairly easy to understand,” said Dotzour. “We have too much supply and not enough demand, and we need to reverse that.”
In his report, Dotzour says this can happen by first curtailing the supply of new homes in the market.
“Virtually everyone agrees that falling house prices are the root of the economic and financial crises in our country. Why are new homes still being built in cities where prices are collapsing and foreclosures are skyrocketing?” he said.
According to the National Association of Realtors, the median sales price for an existing home in October was 11.3 percent lower than a year ago. Texas as a whole fared much better. The median price for an existing home dropped only 0.8 percent.
Dotzour said the supply of homes coming back into the market through foreclosure must be slowed. Government efforts to keep people in their homes have not worked. In fact, they’ve had some disturbing unintended consequences.
“If you’re behind on your mortgage and the government reduces the amount of your mortgage principal and payments, won’t five other homeowners on your block want to stop making their payments to get the same deal?” Dotzour said.
“Only the stigma of bankruptcy and foreclosure can limit that trend.”
The fact that the government is willing to consider freezing interest rates on mortgages and “cramming down” principal has not gone unnoticed by bond investors. Dotzour said many of them have lost confidence in the housing market and are no longer investing there, making it difficult for even Fannie Mae and Freddie Mac to sell bonds to raise capital.
While the supply of homes drops, the demand needs to go up. This means stopping the drop in neighborhood values. How? By giving private citizens an incentive to purchase vacant homes, maintain them and rent them out.
“We need to lower the depreciation schedule for investors who buy troubled houses to around five to seven years,” he said. “And if we really want to solve the problem quickly, offer these investors 0 percent capital gains tax if they hold the properties for more than five years.”
Then there’s the issue of mortgage rates.
“They’re way too high,” Dotzour said. “I think there’s a lack of confidence in the financial integrity of Fannie Mae and Freddie Mac. But now that both institutions have been nationalized, why not just tell the world that, for the foreseeable future, ‘Frannie’ mortgage bonds will be guaranteed by the full faith and credit of the U.S. government?”
He said this would drop mortgage rates substantially and let all Americans refinance their homes at a low rate.
Dotzour’s white paper is available online at http://recenter.tamu.edu/pdf/1884.pdf.