Rep. Dennis Cardoza, a fifth-term Democrat from California’s Central Valley, doesn’t need an economic indicator to describe the state of the housing market. Three cities in his district—Modesto, Stockton and Merced—have foreclosure rates among the ten worst in the country. Seventy percent of Central Valley homeowners are underwater on their loans, owing more than their homes are worth.
“People have walked up to me in the street and handed me their house keys,” Cardoza said. “They don’t have anywhere to turn. This is a major fundamental crisis. People are desperate.”
In spite of the ongoing economic recovery, the housing crisis continues. Distressed sales have pushed home prices down, forcing more borrowers underwater and leading to more distressed sales. The vicious cycle holds dire consequences for millions of homeowners, but no solution is readily apparent. In Washington, Republicans and Democrats are divided on whether government should aid struggling borrowers. Negotiations between all 50 state attorney generals and major loan servicers offer some hope, but are unlikely to bring relief anytime soon.
For the present, the housing market is in the tank, and it is unlikely to be rescued. That doesn’t sit well with Cardoza.
“Even those who aren’t underwater have lost tremendous wealth,” he said. “It’s critical that we do something to stop the downward spiral of home prices.”
Home prices have already reached a nine-year low. Median prices on existing home sales fell to $156,100 in February, the lowest level since April 2002, according to a report released Mar. 21 by the National Association of Realtors. Existing sales plunged 9.6 percent to a seasonally adjusted rate of 4.88 million, well below the 5.13 million projected by economists polled by Bloomberg News.
Bargain prices on existing homes took a toll on new home sales, which fell to an annual rate of 250,000, according to a report released on Mar. 23. That number represented the lowest pace of new home sales since the Commerce Department started tracking the statistic in 1966.
Recovery in the housing market will be driven by job growth, but prices will not rebound overnight, said Scott J. Brown, chief economist at Raymond James & Associates.
“Where I live in Tampa, half of the homes are underwater,” said Brown, adding that the addition of 192,000 jobs to the economy in February was only a small start. “It’s going to take job growth on the order of 250,000 to 300,000 per month for the next two or three years for us to see a full recovery.”
Washington policymakers are split on whether time is the only thing that can fix the housing market. On Mar. 29, House Republicans passed a bill to end the Housing Affordability Modification Program, an Obama Administration initiative to help troubled borrowers stay in their homes.
“The government should have stayed out of this mess,” said Peter Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, a conservative think tank. “The solution from the beginning should have been let prices fall to their natural levels, and let them recover from there.”
But while Republicans would like to remove the government from the private mortgage market, it is widely believed that the White House would veto the HAMP repeal in the unlikely event it passed the Democrat-controlled Senate.
With lawmakers deadlocked, hope has emerged that negotiations between attorneys general from all 50 states and the mortgage servicing industry might lead to loan modifications that break the cycle from distressed sales to declining home prices and back again. While the attorneys general have a proposed a settlement that would force banks to modify more loans, the complicated nature of deal and the acrimonious political climate surrounding negotiations make a timely agreement unlikely.
“As unlikely as a congressional fix may be, I think this settlement engagement is going to be as equally contentious,” said Jason Gold, Senior Fellow for Housing and Financial Services Policy at the Third Way, a moderate think tank. “The shame of is that while we’re arguing about how to make the best policy out of it, the crisis is putting people out in the street.”
For his part, Cardoza introduced the Housing Opportunity and Mortgage Equity Act. Following a plan laid out by two deans at the Columbia Business School last year, the bill would direct federal agencies to help homeowners with government-backed loans refinance at long-term fixed market rates, but without contentious principal write-downs.
While the current calculus makes passage unlikely, the California congressman warned that dire state of the housing market carried high stakes.
“President Obama may have inherited the housing crisis, but it’s his crisis now,” Cardoza said. “We’ve got over 30 million government-backed mortgages. That’s potentially 60 million voters two years from now.”
Updated Mar. 29.