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Kai Ryssdal: The Obama administration’s been trying to do something about the housing market for a year now. Its Home Affordable Modification Program is supposed to help home owners who can’t afford their mortgages and are hard up against foreclosure. Some new rules might help with that. As of today, banks taking mortgage modification applications will actually have to see proof that home owners are making the salary they say they’re making — to see right at the start whether people can afford even a reduced mortgage payment.
You’d think they’d have thought of that earlier. This isn’t the first time, after all, that real estate’s been in trouble in the middle of a lousy economy. Back in the early 1990s there was no rush to rescue homeowners, and still, nobody was talking global economic catastrophe.
Our senior business correspondent Bob Moon has been wondering how come.
Bob Moon: It was 1994, and the year’s top movie was “Forrest Gump.” The title character happened to have a line that aptly described those uncertain times for many Americans.
“Forrest Gump:” My mama always said life was like a box of chocolates — you never know what you’re gonna get.
That was sure true for David Hirshleifer back then. It didn’t matter that he was an economist. He hadn’t figured on the trouble ahead, when he sealed the deal on his southern California home a few years earlier.
David Hirshleifer: Soon after we bought, of course, prices decided to chose that time to decline.
He was one of many home owners caught by surprise in the 90s, as a deepening recession plagued large pockets of the country. With the Cold War over, southern California was one of the areas hit hard by the loss of aerospace and defense technology jobs. That left an overbuilt housing supply in the sprawling suburbs, and prices fell — in some cases, by tens of thousands of dollars.
It couldn’t have come at a worse time for Hirshleifer, just when he needed to make a move.
Hirshleifer: We lost most of our down payment. I don’t actually recall our going underwater, but we experienced a substantial loss.
The recession of the 1990s struck other parts of the country, especially metro areas in the Northeast, just as hard. So why has it become only a dim memory for most of us?
Ed Leamer: The 1990s was not a happy time, but it didn’t have the tremendous problems with foreclosures that we’re having this time.
Economics professor Ed Leamer has tracked the housing market for two decades at UCLA’s Anderson Forecast Center. He says the national foreclosure rate didn’t climb much above 1 percent through the 90s, so it just wasn’t seen as a national problem.
And back then, homeowners were better positioned to avoid foreclosure. That was before so many subprime buyers found themselves struggling with funky mortgages, and homeowners hadn’t gotten hooked yet on cashing out their equity every few months.
So from Boston to Burbank, they just held out for a better price and didn’t blink.
Leamer: Home owners sitting in their homes can deny, deny, deny. They can say, “I’m not going to take a penny less than what I paid for, or a penny less than what my neighbor sold.” So the result is, you get very slow reductions in prices.
In sharp contrast to the willingness, or even anxiousness, of today’s home owners to take what they can get, which might be adding to the downward pressure.
Wellesley College professor Karl Case is a leading expert on the housing market. He points out that back then, people wouldn’t budge for years.
Karl Case: Now if they hold out, they see all this property being auctioned around them, and they get the sense they have to be realistic. There’s a sense of, “Let’s get out of here.” So it’s not just that people are being forced into foreclosure sales, they’re walking.
But what kept strapped homeowners from cutting their losses like that during the worst of the 90s?
Hirshleifer: It was certainly a subject we thought about.
The question wasn’t just an academic one for David Hirshleifer, who’s now an economics professor at the University of California at Irvine. But it never really went past the debate stage when the value of his Southern California home sank in the 90s.
Hirshleifer: People were discussing a lot at the lunch table — friends and colleagues at work, fellow economists — what are the costs and benefits of defaulting intentionally on a mortgage?
Very few homeowners broke their word then, but now, attitudes have certainly shifted, as Wellesley professor Karl Case sees it. He suggests they’ve changed right along with the perceived audacity of corporate bigwigs.
Case: You see these big deals and banks getting bailed out, it makes you a little less sympathetic than you’d otherwise be, for a bank to whom you have the obligation. People say, “If the big guys can do it, why can’t I?”
The irony is, many of those who are fleeing were new buyers who helped lead us out of the 1990s’ recession. Now, UCLA’s Ed Leamer says their absence is going to make this recovery nothing like the last one.
Leamer: The reason, I think, is that we have a totally different kind of mortgage market. Particularly, the subprime market that extended home ownership to the peripheries, in terms of geography, but even more importantly, in terms of income.
Moon: It just fell off at the edges then?
Leamer: Yeah. So you eliminated a large number of potential buyers. And those homes that are sitting in those peripheral areas, they don’t have natural buyers anymore.
If it’s true, this recession is likely to drag on much longer, there’s a hard lesson in making these comparisons: The 90s weren’t as bad, but it still took almost a decade for housing prices in the hardest-hit areas to fully recover.
In Los Angeles, I’m Bob Moon for Marketplace.
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