Reviving the sputtering U.S. housing market will be central to a thus far elusive economic recovery, two Boston-based economists said today in Worcester.
Interest rates at historic lows and foreclosures bringing down median sale prices, but Americans still aren't buying.
"The question is, why aren't there takers out there?" said Eric Belsky, director of the Joint Center on Housing Studies at Northeastern University.
Barry Bluestone, director of the Northeastern University Dukakis Center for Urban and Regional Policy, said the answer is that consumer and business confidence is at historic lows. This summer, he said, consumer confidence hit its lowest point since 1980.
A major reason for that confidence crisis is that American homes have lost 28 percent of their value since 2006, he said, which has translated to a 2.3 percent reduction in household consumption of goods and services, a development which has negative implications for the broader economy.
"There's a very close relationship between losses in home value and where the economy is going," Bluestone said.
Massachusetts homes have seen a less severe drop in housing prices of 17 percent. A recovery here would be less important to the economy than in other states, but would be vital for the remodeling industry, Bluestone said.
Potential homebuyers aren't the only ones leery of financial commitments.
Corporate profits are up 25 percent over the past three years. But companies are sitting on the money and not building new plants or buying a lot of equipment. Such spending, called non-residential fixed investment spending, has fallen 11.3 percent since 2008, despite big profits.
The sluggish housing market has played an even stronger role in dampening GDP growth. Residential fixed investment spending (home building and remodeling) dropped 29.9 percent during that period, Bluestone said.
Economists estimated GDP growth this year will be about 1.5 percent. The economy needs to grow at 2.5 percent to 3 percent to significantly reduce unemployment levels, something some economists now think may not occur until 2017.
Belsky said the most important step the federal government has taken so far to save the housing market is when it put Fannie Mae and Freddie Mac into conservatorship in 2008. With a combined $5.4 trillion in mortgage-backed securities and debt outstanding at the time, a default by either would have sent financial markets into turmoil and made the housing market illiquid, according to the Federal Housing Administration.
"We would have had an unbelievable global meltdown," Belsky said. "That was the single most important thing they've done."
But with the market still anemic, the question now is: What next?
Bluestone said another major federal stimulus package is needed, but he admitted that the odds for that seem poor. President Obama's $447 billion American Jobs Act would not do enough to spur the economy, Bluestone said, and even that plan appears to be facing long odds of passing Congress.
Bluestone also pushed for a federal home price insurance program, under which the government would cover 80 percent of any loss a homeowner incurs in selling his home.