The Guardian Unlimited, February 11, 2008
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Apart from President Bush, there are few people who don't recognize that the economy is headed into the recession. The data show that the unemployment rate is up, jobs are down and car and retail sales are plummeting. This is what a recession looks like, and it is sure to get much worse.
The cause of this bad news is the collapse of the $8 trillion housing bubble that Alan Greenspan and the rest of the economics profession assured us did not exist. While we can look to many more expressions of surprise from the country's leading economists, the basic story is very simple. The surge in housing wealth created by the bubble had propped up consumption over the last six years, as people borrowed against the new wealth in their homes almost as fast as it was created.
This story has flipped into reverse. House prices nationwide are now falling at a 16% annual rate. At this rate of decline, $3.2tn of housing wealth will disappear over the course of a year. That's more than $40,000 for every homeowner in the country. This is the reason that consumption is now plummeting.
The plunge in house prices is also causing millions of people to lose their homes. The adjustable rate mortgages (ARM) that Greenspan promoted are resetting to higher interest rates. With many homes now worth less than the value of the mortgage, homeowners find themselves unable to refinance and unable to afford the higher reset rate. This has pushed the foreclosure rate to almost 170,000 homes a month, a record high.
There is little that can be done to help most of the homeowners who are seeing their equity vanish before their eyes. This home equity is the life savings of many families, most of whom had little wealth apart from their home. This situation should make us once again thankful for Social Security, since this will be the sole source of retirement income for many victims of the housing crash.
At this point, the government cannot reverse the monumental policy failure of allowing the housing bubble to grow unchecked, but it can help out some of the victims. It can temporarily change the foreclosure laws to allow moderate-income homeowners the option to remain in their homes as renters.
Under this "own-to-rent" plan, the judge handling a foreclosure would call in an independent appraiser, who would determine the rental value of a house in the same way that an appraiser determines the sale value of a house before a bank issues a mortgage. The homeowner would then have the option to remain in the house as a tenant, paying the rent determined by the appraiser.
This policy would provide some security to millions of moderate-income homebuyers. They would have the assurance that they would not be thrown out on the street by a foreclosure. More importantly, this own to rent policy would provide the mortgage holder with a very strong incentive to negotiate terms that allow the homeowner to keep ownership of their house because banks are not interested in becoming landlords.
This is a very simple policy that can be carefully targeted to help those most in need. For example, the option to rent can be limited to homebuyers who purchased a house that sold for less than the median house price in an area. That way the policy doesn't help people who bought million-dollar houses. This policy also has the benefit that it will not help speculators or those who committed fraud in getting their loans. The option to rent is of no value to these people.
In the run-up of the housing bubble, millions of moderate-income families purchased homes, following the advice of politicians, investment advisors, economists, community groups and a lot of other people who should have known better. The poor should not again be forced to pay for the bad judgment of the policy elites. Own to rent is a very simple policy that can make a huge difference for millions of people. In the absence of a better proposal, Congress should have it at the top of its agenda.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.