Fixing America’s broken housing market

A SURE sign of a dysfunctional market economy is the persistence of unemployment.
In the United States today, one out of six workers who would like a full-time job cannot find one.
It is an economy with huge unmet needs and yet vast idle resources.
The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter last year), while hundreds of thousands of houses sit vacant.
Indeed, the foreclosure rate is increasing.
Two million Americans lost their homes in 2008, and 2.8 million more last year, but the numbers are expected to be even higher this year.
Our financial markets performed dismally – well-performing, “rational” markets do not lend to people who cannot or will not repay – and yet those running these markets were rewarded as if they were financial geniuses.
None of this is news.
What is news is the Obama administration’s reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed. Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future.
This stance is perplexing and possibly dangerous.
It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned.
Mastering the specific information related to assessing creditworthiness and monitoring the performance of loans is precisely the kind of thing at which the private sector is supposed to excel.
It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending.
If the government were to walk away now, real-estate prices would fall even further, banks would
come under even greater financial stress, and the economy’s short-run prospects would become bleaker.
But that is precisely why a government-managed mortgage market is dangerous. Distorted interest rates, official guarantees, and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy.
Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support.
Supporting further real-estate investment would make the sector’s value even more dependent on government policies, ensuring that future policymakers face greater political pressure from interests groups like real-estate developers and bonds holders.
Current US policy is befuddled, to say the least.
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise.
Avoiding this dismal “new normal” will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.
Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not.
For one out of four US mortgages, the debt exceeds the home’s value.
Evictions merely create more homeless people and more vacant homes.
What is needed is a quick write-down of the value of the mortgages.
Banks will have to recognise the losses and, if necessary, find the additional capital to meet reserve requirements.
This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy. – Project Syndicate

*Joseph E. Stiglitz is a professor at the Columbia University and a Nobel laureate in economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese, and Spanish.