Mark Zandi's Take on the Housing Crisis, Mortgage Interest Rates and Green Shoots

With this housing crisis and economic downturn, Mark Zandi has to look at all the moving parts. Chief economist for Moody's Economy.com, a company he founded, he's paying close attention to mortgage interest rates, falling house values, and housing inventory in order to assess whether the so-called "green shoots" are real - or simply a mirage.

I spoke extensively with Zandi last week, discussing a wide range of housing and economic issues. Here's his take on some hot topics. (Please note: Some of his answers have been shortened for clarity.)

• Green Shoots: "I'm optimistic. But that view is very much a forecast...I think the fundamentals are coming together for an improvement in [housing] demand...the green shoot is stable housing demand."
• Housing Market Recovery: "The big difference between now and then (2006) is that housing prices have dropped 35 percent. Housing affordability has been restored in a big way. Today, [housing affordability] is as high as it has ever been. In 2007, it was about as low as it has ever been."
• President Obama's Loan Modification Plan: "If you look at the Administration's modification plan, it's a lucrative plan for servicers. You'd think they'd step up. They say they are, but we need to see it. One problem with the plan is that it's complicated and it takes time to get everyone's mind around it and that's what I'm counting on. We're all working through this and taking time to figure it out. Once they [the loan servicers] do, we'll be off and running, but we will see more loan modifications later this year and early next year.
• Retail sales. "Retail is flat from where it was at Christmas. That's a green shoot."
• China vs. Europe. "China is reaccelerating. Their massive stimulus policy has kicked in. Europe has been reluctant to provide stimulus, and their banking problems are worse, and their in the soup for longer. Also, the U.K., Ireland, Spain, and parts of France have had their own housing bubbles."

• Latin America. "Latin America is improving too, except for Mexico. Latin America has provided massive stimulus and has links to Asia. China and Brazil are tethered at the hip, and that's lifting conditions in Brazil. Mexico has other issues.

But the $1 million question is about hyper-inflation. Will we see sky-high interest rates? What does Zandi think about that? I'll continue the discussion in tomorrow's blog.