Despite the government's efforts to help the housing market, economists estimate that about 1 in 4 households with a mortgage owe more than their house is worth.
Foreclosures continue to rack up -- they hit a record high last month. And home construction remains near a 50-year low.
Some analysts say the government has done too much already and that the market should be left alone. Others think the government should take bolder action.
Giving Homeowners A Break
William Wheaton, an economist with MIT's Center for Real Estate, says the housing market is woven into the fabric of the economy: There are hundreds of thousands of residential construction jobs, and the fall in home values affects Americans' ability and willingness to spend money.
There are also subtle impacts. For example, if someone is stuck in a house they can't sell, they're less likely to move to take a better job in some other part of the country. Losses on foreclosures also hurt banks.
The possibility of several million additional foreclosures could also push house prices even lower.
"What worries me is that the recent data suggests as many as 25 percent of people who have mortgages in the U.S., those mortgages are underwater," Wheaton says.
The Walk-Away Option, A 'Bargaining Solution'
A homeowner is "underwater" if they owe more than their house is currently worth. Wheaton says that's going to result in more and more people deciding to just walk away from their homes. For example, a homeowner living in Arizona who paid $600,000 for a house that is now worth $300,000 is likely to walk away.
Wheaton says the solution is for lenders to cut the amount people owe to the value of their house. In the case of the Arizona homeowner, the bank would forgive $300,000 of the loan. But in exchange, the homeowner would give up half of the gains as the house appreciates.
"In many situations in economics, you resolve these conflicts through what's called a 'bargaining solution,' where you split the losses," Wheaton says. The alternative, he says, is an additional 2 million to 3 million foreclosures.
A Massive Government Refinance Program
Or the government could automatically refinance millions of homeowners -- a plan proposed by economists R. Glenn Hubbard and Christopher Mayer of the Columbia Business School.
"If we had normally functioning markets, we would have already seen 30 million people taking out new mortgages," Mayer says.
With home prices down and tighter lending standards, many people can't qualify to refinance right now, he says. So they are stuck paying interest rates around 6 percent or more. A typical borrower could save around $2,000 a year if they could refinance at today's lower rates, Mayer says.
He is calling for the government to "reach out to 37 million borrowers with government-guaranteed mortgages and offer them an inexpensive and expedited opportunity to refinance their mortgages."
He says this shouldn't cost the government a lot since it's already on the hook, guaranteeing most home loans through Fannie Mae and Freddie Mac or other avenues.
"The government is the market," Mayer says.
He says that refinancing loans automatically will mean homeowners will be better able to pay their mortgage and less likely to default. What's more, he says, it will put more money in people's pockets to spend and stimulate the economy.
Moving Away From Government Intervention
Anthony Sanders, the director of the Center for Real Estate Entrepreneurship at the George Mason University School of Management, says the government's earlier efforts to prop up the market have already resulted in a takeover with the government guaranteeing almost all new home loans.
"When they intervene, good luck with getting them out of there," Sanders says. "Where does this stop?"
He remains concerned about unintended consequences. Maybe these proposals would somehow result in more losses for banks down the road. After all, if homeowners are paying less on their mortgages, a bank, a group of investors, or a pension fund somewhere will no longer be getting those higher interest-rate payments.
Sanders says it's time for the government to back away from these interventions and allow the market to chart its own course.
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ARI SHAPIRO, host:
And moving from cars to homes, despite all the government efforts to help the housing market, things still look shaky. A quarter of Americans with a mortgage owe more than the house is worth. Foreclosures remain at record highs, and fewer homes are being built.
All this leads economists to conclude that the Obama administration has some stark choices to make about housing, as NPR's Chris Arnold reports.
CHRIS ARNOLD: Analysts tracking the housing market right now you could put into two camps. Some say the government has done too much already. If prices want to fall further, they say, we should just back away and let them fall and be done with it. But a number of other prominent economists - both liberals and conservatives - are saying just the opposite. They think we need bolder action than anything the government or the banks have done so far.
Professor WILLIAM WHEATON (Massachusetts Institute of Technology, Center for Real Estate): So we'll start off and think about the role of real estate in the economy.
ARNOLD: Professor William Wheaton is teaching in a packed lecture hall at MIT's Center for Real Estate.
Prof. WHEATON: Construction is so far in the trench that it's only two percent of GDP right now. Its normal level in the United States is about six percent of GDP.
ARNOLD: Wheaton explains that the housing market is very woven into the fabric of the economy. The housing crash means construction layoffs, less consumer spending, of course, huge losses for banks. And Wheaton says all these homeowners who are underwater, owing more than their house is worth, he thinks a lot more of them will start walking away from their homes. That would mean more foreclosures and even lower home prices.
Prof. WHEATON: If you're in a place like Arizona and you bought a house for 600 and now its worth 300 or 250 and somebody comes and says: You know, it's never going be back at 600, and there are neighbors down here right across the street from you who are buying the same house for, you know, 250 or $300,000 and their debt service is half of yours, that's pretty difficult to avoid walking from that situation.
ARNOLD: So here's Wheaton's proposal: He wants lenders to cut the amount that people owe to the value of their house so that they're not underwater anymore. But in exchange, the homeowner would have to give up half of the gains if the house appreciates in value. So, if in five years they sell the house for a profit, they then have to split that gain with the lender.
And right now there are many other proposals. One that's getting a lot of attention calls for a staggeringly large government refinancing program. This proposal comes from two economists at Columbia University: Glen Hubbard, who headed up President George W. Bush's economic team, and his fellow economist, Chris Mayer.
Mr. CHRIS MAYER (Economist, Author): If we had normally functioning markets, we would already have seen, you know, 30 million people taking out new mortgages.
ARNOLD: That's because interest rates have recently been extremely low, and borrowers who can qualify can save hundreds of dollars a month. But the problem is that there are many borrowers who can't qualify. Home prices are down, lending standards are tighter, so...
Mr. MAYER: We are calling for the government to reach out to 37 million borrowers and offer to refinance their mortgages.
ARNOLD: Mayer says it makes sense to do something like that because the government is already on the hook for those mortgages. It guarantees them through the mortgage giants Fannie Mae and Freddie Mac, or in other ways.
Mr. MAYER: The government originates more than 19 out of every 20 mortgages. So the government is the market.
ARNOLD: So Mayer and Hubbard say: Why not refinance these people who can't qualify? They'll be better able to pay their mortgages, less likely to default and cost the government money, and to boot, you'd be putting more money in millions of people's pockets for them to go out and spend and stimulate the economy. But let's hear part of that last quote one more time.
Mr. MAYER: The government is the market.
ARNOLD: As you might guess, that makes some economists' hair stand on end.
Professor ANTHONY SANDERS (Finance, George Mason University): If this doesn't even terrify the most hardened person out there, I don't know what does.
ARNOLD: Anthony Sanders is a real estate finance professor at George Mason University. He says the government's earlier efforts to prop up the market have already resulted in them essentially taking over the market, guaranteeing almost all those new home loans.
Prof. SANDERS: This is the byproduct of government intervention. When they intervene, good luck getting them out of there. When does this stop?
ARNOLD: Sanders is basically worried about unintended consequences. Maybe these proposals would result in more losses for banks or pension funds, which wouldn't be getting those higher interest rate payments from homeowners. And Sanders just thinks it's time for the government to back away from interventions and to allow the market to start charting its own course.
Chris Arnold, NPR News, Boston. Transcript provided by NPR, Copyright NPR.