TEXT OF INTERVIEW
TESS VIGELAND: You didn’t think we’d get through a whole hour without talking about housing, did you? Well, this week the Case-Shiller Index delivered a sliver of optimism. Home prices rose by a third of a percent in January, in large part thanks to a bump here in California. That news comes on the heels of an effort by the Obama administration to help more folks stay in their homes. But there’s still the question of whether any of this means much.
For some answers we turn to Ed Leamer, director of the UCLA Anderson Forecast. Thanks for joining us.
Ed Leamer: Thank you very much for having me.
VIGELAND: First, let me ask you a question that I’m asking just about every housing expert that we bring on the show. Where do you think the market is right now? Is it in recovery? Is it still dropping?
Leamer: I think that there has been a stabilization. There hasn’t been significant appreciation. This market isn’t going to get healthy again till we get the buyers back. It’s a chicken-and-egg problem, because the buyers are not going to come back until they’re confident that home prices are going to stabilize.
VIGELAND: Or the very least, not go down.
Leamer: Yeah. And normally, if you get a sale, a lower price, people will rush out and buy more. But when it comes to homes, when the prices fall, buyers are thinking, “Well, I think maybe another price cut could be coming around the corner here,” and nobody wants to buy that property. And the lender doesn’t want to make a loan on it. Shakespeare said that when home prices are declining “neither a borrower nor lender be.” Or I think he said that.
VIGELAND: Yes, I’m sure he was referring to the housing market. Well, there have been all kinds of efforts to get the housing market going again, and none of them seem to have had much traction. What are your thoughts on this latest plan to reduce principal on mortgage payments for folks who are underwater?
Leamer: Yeah, I have mixed feelings about this, because we qualified individuals who don’t really belong in homes.
VIGELAND: They couldn’t afford the mortgage.
Leamer: Exactly. So the right program is not to try to desperately hold those people in homes, but rather to encourage them to become renters, and facilitate the process by which these homes are turned from owner-occupied homes into rental units.
VIGELAND: You know, part of the concern recently has been about adjustable-rate mortgages. You look at a lot of folks who took out, say, a 5/1 ARM back in 2005 or a 3/1 back in ’07. Now it’s set to adjust, and the theory is it’s going to create a lot more homeowners who can’t afford the mortgage, but so far that’s not happening, right?
Leamer: Yeah. Ben Bernanke has been very kind to those home owners by giving us these incredibly low interest rates, so that they are the basic and switch the adjustable mortgages adjust. That’s likely to exist for some time, but not that long. Home owners who have mortgages that are these adjustables, need to start thinking about what’s the right time to lock in the longer term mortgage.
VIGELAND: Yeah, I guess it’s just hard to make yourself do that, because right now, your mortgage rate might actually be dropping.
LEAMER: Yeah, it’s very seductive. That’s what got us in trouble in 2004, 2005. The teaser rates didn’t come from Wall Street, they really came from Washington D.C. and the Federal Reserve.
VIGELAND: And finally, you know this past week, the Federal Reserve stopped buying mortgage-backed securities from Fannie Mae and Freddie Mac. Give us a sense of why that is important, and what it means for folks who are in the housing market?
Leamer: Well, I’ve been coming back to Shakespeare again, if no one wants to be a lender for the home prices that are declining or potentially declining, Federal Reserve widely recognizes that problem and became a lender, in effect by buying these mortgage-backed securities, hoping I suppose that the market would become regular again. I think there’s some considerable risk in the short run that the absence of that Federal Reserve support is going to be raise interest rates.
VIGELAND: On mortgages.
Leamer: On mortgages. And possibly discourage people from buying homes. But the thing to understand is that nobody’s buying a home, unless they have some feeling of urgency there, “If I don’t get it now, I’m not going to get it.” And that urgency comes, because you think home prices are going to go up. But it can also come, because you think mortgage rates are going to go up. So it’s not crystal clear what the threat of increased mortgage rates will do to the housing market.
VIGELAND: Ed Leamer is director for the UCLA Anderson Forecast, and we’ve been talking about the latest in the housing crisis. Thanks so much for your help.
Leamer: Thank you very much.
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