The housing crisis in context

Chris Farrell Apr 4, 2008

The housing crisis in context

Chris Farrell Apr 4, 2008


Tess Vigeland: Perhaps you heard a couple of months ago when I somewhat jokingly referred to the show as “Marketplace Mortgage.” For this week, it’s official.

The drumbeat of negative numbers from the housing market just doesn’t stop. This week, we learned that defaults on privately insured mortgages rose 38 percent in February, foreclosure filings increased by an almost surreal 60 percent, some in Congress are floating the idea of a $400 billion bailout and because of all of this, investors are dealing with stock markets swings of 300 points or more from day to day.

At some point you just want to tune it all out, but because the real estate mess is bleeding all over the economy, you can’t.

So let’s start things off with your friend and mine, Chris Farrell, to go over some of the basics of how we got here and why.

Vigeland: Hello.

Chris Farrell: Hey Tess. I’ll try and give us the background here.

Vigeland: Let’s start with this: we’ve been calling this a housing crisis, a mortgage meltdown, for months now, but give me a little context here. How bad is this?

Farrell: When we look at the housing market, it’s bad and the main measure that I would use is home prices, and if you take the home prices over the past three months and you annualize that, prices are falling at about a rate of 20 percent and that’s using the Standard & Poors Case-Schiller index of 20 major cities, which really is the index we’re all using right now because it’s fairly sensitive to what’s happening in the market.

Vigeland: Well, that sounds pretty bad already. How bad could it get?

Farrell: There’s some indications that perhaps we’re talking about a 30 percent decline, perhaps we’re talking even about a 40 percent decline, but we could also just get a long-term period of stagnation. One way of thinking about this, Tess, is that if you take the real home price from 2000 to now, they’re still up 63 percent. During that same period of time, median household income rose about 15 percent. Mathematically, that suggests to me that home prices are either going to go much lower or they’re going to stagnate for a long period of time until household incomes catch up with home prices.

Vigeland: Now, of course, I keep saying “Oh, the drop in home prices; this is a terrible thing,” but on the flip side, for a lot of people, this is opportunity.

Farrell: Absolutely, and I’m really glad you raised that, because what we’re concerned about is this national decline in prices taking the economy down, so that’s what the Fed and the regulators are worried about and that’s what they’re fighting against. At the same time, if the economy is not going to collapse into a great depression, if we’re not going to have a freeze-up of the financial system, an overall decline in home prices that makes homes more affordable for lots of people is not necessarily a bad thing. It’s called a market working.

Vigeland: We’ve obviously had housing crises before in this country. Can you compare the current one to previous downturns that we’ve seen?

Farrell: Well let’s go back to the late 80’s, early 90’s and the area that you live in: Los Angeles. You had a 30 percent decline in prices in L.A., that’s a real decline, adjusted for inflation. So, we’ve had big price declines before. What makes this one unusual is really this is the first time in the post-World War II era that we’re dealing with a national decline in home prices.

Vigeland: You say we haven’t seen this since the end of World War II. How much a part of the Great Depression was the housing market?

Farrell: The lesson of the Great Depression is housing prices fell and they fell dramatically and you also had a collapse in the mortgage market. What the Fed today is worried about is that you don’t let your financial system freeze up when the banking system fails, when the financial system fails and all these mortgages go bad, it feeds on itself and you end up with 25 percent unemployment. We have 5 percent unemployment today. What the Fed is trying to do is prevent the financial system from freezing on itself and the economy entering a free fall.

Vigeland: Alright, so as we go through this hour talking about the housing mess, what should listeners be keeping in mind A: if they are currently a homeowner, or B: they are not a homeowner, but would like to be?

Farrell: If they are currently a homeowner and they’re paying their mortgage and they’re not having a lot of trouble doing it, you’ll be fine and the market will rebound at some point in the future; we know that. If you’re a homeowner and you’re on the financial edge, then you want to take advantage of the programs that are being offered and negotiate with your lender for a better deal. If you’re a buyer, boy, I’ll tell you, I would be improving my credit score, I would be boosting my savings and I’d be out there looking for what is it that I want — no rush — but boy, when I’m ready to move, I’m going to buy.

Vigeland: Alright. Thanks so much Chris.

Farrell: Thanks a lot.

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