What’s the Future for Housing?

By Christina Scotti Features FOXBusiness

What's Housing's Future?

Full interview with Trulia economist Jed Kolko on what President Obama's speech Tuesday meant for housing. Christina Scotti reports

This is a transcript of the full interview from Trulia’s Chief Economist Jed Kolko on his latest housing findings and what President Obama’s speech Tuesday means for the market in the future.

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On Tuesday, President Barack Obama called for a series of reforms in the housing market for both borrowers and lenders, which, he said, would help boost homeownership and protect the market from another housing bubble.

Trulia chief economist Jed Kolko is with us in studio to talk about the overall state of the housing market and what he thinks of the housing policies laid out in the plan.

Scotti: So, right off the bat, the housing market right now – is it good or is it bad?

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Kolko: The housing recovery is doing very well. We are seeing almost every measure doing much better than it was two to three years ago. Pretty much everything that should be improving is up: construction, sales, prices. And everything that should be down is down. So there are fewer vacancies, fewer people falling behind on their mortgage payments at the beginning and fewer people late in the foreclosure process in the end.

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Scotti: The latest Trulia survey actually says that asking prices have dropped this month for the first in eight months.

Kolko: Exactly. We saw, last month, that asking prices fell. That’s the first time we’ve seen that in eight months. That’s a big change. Prices have been rising almost as fast as they were rising during the bubble last decade. So to see asking prices start to slow down, is the first good sign that we are probably going to avoid getting into another bubble this time around.

Scotti: What exactly does that mean -- that the asking price is falling? That inventory is now expanding? Is that investors going away? What are the reasons why the asking price has calmed down a little bit?

Kolko: We’ve been expecting asking prices and sales prices to start to fall or at least slow down. There are three reasons why prices should slow down.

First of all, rising mortgage rates. Rates have risen by more than a point over the past two months and that makes buying more expensive, meaning people can afford less and that keeps prices lower.

The second is that there has been more inventory. Since the beginning of the year, inventory is up about 6%. Now that may not be enough for buyers who are looking for a home to feel the different, but more inventory also cools down those price gains.

And finally, we are seeing less interest from investors. Remember, investors, in many markets, were helping to bid up some prices and competing with other potential buyers. But with prices now higher than they were a year ago, there aren’t as many bargains for investors to get. So that means less investor interest and that’s also slowing down those price gains.

Scotti: Why is inventory expanding?

Kolko: Inventory is expanding for two reasons. First of all, there is a lot more construction than there was one, two or three years ago. During the recession, construction fell to incredibly low levels which meant very few new homes came on to the market. Now that construction is rebounding, we’re seeing more new homes for sale. But also, because prices have been rising for almost a year and a half, many homeowners are back above water and others have decided that prices have risen enough that it’s now worth selling. They have been waiting to see more price appreciation before deciding to sell their home and many are deciding that now is the time to at least start thinking about putting their home on the market.

Scotti: So asking prices are now leveling off. Are we going to continue to see this or are [asking prices] going to go back up? What do you think?

Kolko: Prices are volatile. Prices bounce around. Sales prices also bounce around. But we’re probably going to see prices rise at a much slower rate going forward than we have over the past six or 12 months. Prices will probably keep rising over the next year, but at a much slower rate than we’ve seen in the previous year.

Scotti: So let’s talk about President Obama’s speech [Tuesday], what were your takeaways?

Kolko: His speech [Tuesday] showed how different the housing market is now than it was even six months or 12 months ago. Twelve months ago, one of the top policy priorities was helping people stay in their homes, preventing foreclosures. Now,that was far from the top policy priorities in the speech.

Instead, we heard more about making it easier for people to refinance. We heard a lot about making it easier for people to get a mortgage. Mortgage credit is still very tight and that’s holding back some people who want to buy but can’t. And of course we’ve heard about longer-term reform of Fannie and Freddie. The president called for winding them down but that could mean a lot of different things and it’s going to take years before we know for sure what that might look like. Even without Fannie and Freddie, there could still be a big role for the government in the housing market to prevent catastrophic losses in the case of a big housing market downturn. Some people in Washington want to see that kind of government backstop in a catastrophe, some don’t. And that will be part of the debate that goes on, probably for years in Washington.

Scotti: I’ve seen a lot of news recently talking about how first-time homebuyers are being priced out. Do you think that these policies, if they are in place, do you think they will actually do some good?

Kolko: Short term we are more likely to see more mortgage credit. In other words, short term, in the next year or two, it should be easier to get a mortgage – and there are a couple of reasons for that.

First of all, new mortgage rules coming into effect next year should make things a little bit clearer for banks what their legal and financial responsibilities are around different types of mortgages. That should hopefully make them more comfortable making more mortgage loans.  

At the same time, with mortgage rates rising, there is less demand for refinancing. At higher rates, it’s worth a lot less to consumers to refinance their loans. If banks have less refinancing activity, that could free up some capacity for them to write more mortgages for people who want to buy homes. So for both of those reasons, we could see more mortgage credit available

Scotti: [Tuesday] President Obama used the word “responsible” many times, as you pointed out to me. Why do you think that is?

Throughout the speech, the president referred again and again to responsible home buyers, responsible home owners, responsible families. Remember, there was a lot of blame to go around in the last housing bubble. Banks, individuals, a lot of people took risks, that it turns out, they shouldn’t of taken. The president was very careful to explain that the housing policies should help responsible home owners and responsible borrowers – and by implication, not help those who are irresponsible.

Scotti: He also pointed out that people who may not be qualified to buy a house right now, that there should be affordable rental properties. Can you talk to me about that?

Kolko: The president was clear that home ownership was not for everyone. And that means that there are many people who will need to rent and affordability on the rental side is a growing problem right now. Remember, even as housing prices fell during the recession, rents were rising during much of that period. Even though buying today is relatively cheap because of low rates and because of fallen prices, compared to where it’s been in the past, renting is actually quite expensive relative to where people’s incomes are, especially in the big coastal cities. Affordability for renters is a big problem.

Scotti: How would [President Obama] help renters?

Kolko: There are government programs that are designed to build or preserve more affordable housing and also often there are pretty strict regulations that prevent the construction of big buildings for all levels of income. Now a lot of that is state and local policy issues around zoning and building regulations but the President took a stand that it’s important to make it possible to build more, especially in these least affordable markets.

Scotti: Do you think it’s a realistic idea to wind down Fannie and Freddie – and is it a good idea?

Kolko: I think it’s very realistic to wind down Fannie and Freddie, but winding down those two institutions still leaves a lot of open questions. You can wind down the institutions, but you can’t wind down everything that the institutions do because a lot of what they do could be taken up by other institutions or newly-created institutions.

The real question is how much of a government backstop will there be in case of another housing downturn with lots of people defaulting on their mortgages. And there is now a lot of disagreement, even among people who agree that Fannie and Freddie as we know them today should go away, there is still a lot of disagreement among those people about how much of a government backstop there should be longer term.

The reason why this really matters is the future of the mortgage offerings that we know so well, like the 30-year fixed-rate mortgage depends, in part, on what kind of guarantees there are. Those are risky types of loans for banks to hold themselves long term. So,  I think one of the challenges is thinking about how to reduce the role of government in the mortgage market while trying to preserve the central role of the 30 year fixed rate mortgage.

Scotti: So do you think these housing reforms are good ideas – and are they realistic ideas?

Kolko: I think, and most people think, it’s important to reduce the role of government in mortgage market today. Government right now is insuring or guaranteeing almost 90% of new mortgages. That’s incredibly high compared to historical standards and I think we all want to see more private capital involved in the mortgage market and see a reduction of government’s role. The question is how much of a backstop should there be long term.

Scotti: But we also want to see people able to get mortgages and I’m not sure, if banks are at the helm, whether they will be more likely to get mortgages, right?

Kolko: In the end, that’s the trade off: how much do we want to preserve and promote homeownership, even if it means that taxpayers and the government may be on the hook in the case of a downturn? That’s the fundamental question and ultimately that is a political question. There is no easy answer to that and our politicians are tasked with deciding how much we want to value homeownership against not putting government and taxpayers in the position of being on the hook in the case of a downturn.

Scotti: Last question, what’s a good tip for all of us? What should we know about housing in the future?

Kolko: One of the big questions that people ask is whether to buy right now. Prices are still relatively low compared to where they have been in the past, even though they are rising. And rates are still quite low, relative to where they have been in the past. Do you buy now or do you buy in a year from now? It really boils down to this: A year from now mortgage rates will probably be higher than they are today and prices will probably be higher in most markets than they are today. So, it will be more expensive to buy a year from now than today. But there should be more inventory on the market, more homes to choose from than today and it will probably be easier to get a mortgage. So, the trade off is you can save a bit of money probably if you buy today or you will probably have more to choose from and have a better chance at getting a mortgage.


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