Issue brief: Housing

The Electoral Issue:

The housing market, which collapsed in 2007 and helped throw the economy into a recession, has still not recovered. House values remain low, trapping owners in mortgages that exceed the value of their homes. The glut of foreclosed homes continues to clog the market, keeping prices low.

The Challenge:

To increase home prices by nursing the market back to health, foreclosing where necessary and keeping people in their homes where prudent, and to prevent another real-estate bubble from forming.

Problems:

Too many easy mortgages

The housing market crashed largely because too many people bought homes they could not afford. Poor personal financial management played an obvious role, but the proliferation of shady financial products that encouraged people to sign up for mortgages they couldn't afford was also a huge contributor to the crash.

As the market crashed, those homeowners that could afford to get out from their mortgage often sold at a loss. Many remain stuck paying mortgages that now exceed the value of their home (called "underwater mortgages"), and more still have been pushed into foreclosure. In the wake of the housing market's collapse, it is not clear that these risky financial practices have ceased, raising the prospect of another bubble in the future.

Foreclosures

Between 2007 and early 2012, roughly 4 million families were pushed into foreclosure, starting a vicious cycle: as foreclosures accelerated, prices were depressed further, which led to more foreclosures. Banks that loaned money to subprime borrowers were forced to absorb billions of dollars in losses as more and more homeowners - many of whom lost jobs or income due to the recession - were pushed into delinquency.

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The glut of foreclosed homes affected some housing markets disproportionately, particularly areas of California, Nevada, Florida, and other states that were grossly overbuilt and overvalued during the height of the real estate bubble.

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After a brief drop in foreclosure filings in 2011 due to lenders' concerns about legal liability, banks and other mortgage agencies resumed the foreclosure process at a fast clip - in August 2012, according to foreclosed-property marketer RealtyTrac, 193,508 homes were served a foreclosure notice, an increase of 1 percent from July. Perversely, the health of the real estate market may actually be inversely correlated with the rate of foreclosure filings - only after the bad loans have been cleared out of the market can housing prices climb.

Housing Prices

The housing market peaked around March 2006, and began steadily falling throughout 2007. In 2008, the bottom fell out, and housing prices plunged nationwide. In March 2012, the median home price in America stood at $234,500, and the average stood at $291,200, the lowest level in nearly a decade.

Because most families' home ownership is their biggest source of equity, the drop in housing prices has resulted in a staggering drop in median household net worth: according to the Federal Reserve, the median household net worth in 2010 was $77,300, down from $126,400 in 2007. The crash in housing prices directly caused a full three quarters of this loss, with declines in real income accounting for much of the remainder.

There are signs that housing prices may be slowly climbing up from recent lows. According to the latest data from the Case Shiller housing price index, home prices in July 2012 gained 1.6 percent compared to a year ago. All 20 regional markets monitored by the index have posted gains for the last three months, and 16 of 20 showed improvement over the previous year. Still, as of March 2012, almost a quarter of U.S. homeowners - approximately 11 million - were underwater on their mortgage. There may be tentative signs of health in the housing market but it has a long way to go before the market is healthy again.

Fannie Mae and Freddie Mac

Many conservatives identify the prime culprits behind the housing crisis as Fannie Mae and Freddie Mac, two "government-sponsored enterprises" (GSEs) that help extend home ownership to low-income households. Fannie and Freddie purchase mortgages from private lenders, providing these loans with the government's backing.

As part of their mission, Fannie and Freddie are required to purchase a number of loans to low- and middle-income borrowers. Critics argue that these sorts of federal affordable housing policies put people in homes they could not afford. When these subprime borrowers became delinquent in their payments, the market went belly-up.

However, some caution against blaming Freddie and Fannie for the crisis, arguing that most of the subprime mortgage market was driven by private lenders, not the GSEs (Federal Reserve data from 2006 indicated that 83 percent of subprime loans in that year were issued by private lenders.) While GSEs may have pioneered the subprime mortgage craze, private lenders were more than happy to get in on the action and eventually far outpaced Fannie and Freddie in their subprime lending.

As the Atlantic's Jordan Weissman puts it, "If GSEs helped pave the road toward the cliff, it was private sector loans and securitization that nearly took drove us over the edge. Blame banks for taking us to the brink, blame Fannie and Freddie for blazing the trail, and blame Congress for failing to put the brakes on the whole enterprise."

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