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Wheaton blames the housing crisis on two key factors: a "bubble" in the market for second homes and a fundamental expansion in mortgage credit availability. This helped create an unprecedented rise in housing prices between 1998 and 2006, even as the overall economy stalled during the 2001 recession. American home ownership rates, which used to hover at 62 to 64 percent of occupied homes, shot up to more than 69 percent in 2006. Then, as subprime mortgage holders began to default, prices dropped and sales in many regions ground nearly to halt. The home ownership rate is now about 67 percent.
Wheaton outlines how first-time home buyers and property investors may be the key to the housing market recovery in a paper co-written with Gleb Nechayev, vice president and senior economist with Torto Wheaton Research, an independent research firm owned by CB Richard Ellis, and where Wheaton is a principal partner. The paper was presented in February at a housing symposium at the University of California, Irvine, and posted in March on the Social Science Research Network, www.ssrn.com. The MIT News Office talked with Wheaton about his research.
Q. Your paper is titled, "What will it take to restore the housing market?" So, what will it take?
A. This rise and fall of prices in the current housing market is completely different than anything that has ever happened in the housing market in its post-war history. Hence, the way we get out of (the stalled housing market) is going to be different than the way we got out of previous corrections in the housing market. A good way to see this is to look at California, which happens to have better data than any other state. There has been a big fall in home prices there - 35 percent in the last nine months. But recently sales have completely recovered back up to where they were in the state's best years. The housing inventory shot up last year, but now is falling rapidly because investors and first-time home owners are buying up houses. Unlike the move of an existing owner, these buyers don't put another house on the market and hence they can eat up the inventory very, very quickly. We still have probably upwards of a million foreclosures to go through in the next year and as those houses hit the market prices are going to stay low. But I don't think they are going to fall much further as investors and first-time home owners step up to the plate and buy. That's how we'll come out of this.
Q. Should the federal government intervene?
A. If the government steps in and subsidizes current subprime mortgages that could be just postponing the day of reckoning with foreclosures. The government should NOT prop up house prices. In California, the market is correcting because prices are falling. While people may lose their homes, as prices fall and investors buy, they then turn right around and rent the properties largely to the people who were foreclosed upon. In each of the past two years more than half a million homes were converted back (to a rental property) each year and that's very good. We need to wind the homeownership rate back down to normal levels.
Q. Your paper noted that the national number of constructed housing units hit an all-time high in 2006 before collapsing in 2008. Has construction leveled off?
A. Yes, and I would hope we don't see any construction for a year or two more. I hope the homebuilding industry takes a long rest. In 2008 we created only 600,000 new households in total, renters and owners. Recently we had been creating about 1.1 million. With the current economy, grown children are now staying home, people are doubling up. If you're building 500,000 housing units or less yearly, then you are still eating up inventory. You should be able to grow yourself out of the problem in two years. So I'm not in favor of any increase in home building - at least for another year or two.
Q. Your paper bluntly states that new factors "render traditional econometric forecasting relatively useless in judging where markets will go in the future." Are you predicting that we can't predict?
A. It means you have to analyze the market with what I call pen and pencil rather than with time series and computers. You have to think about where sales are coming from, whether they will reduce the inventory. You just can't run a statistical model on a short time series. If the factors driving the market are unique, then you have no precedent or historical data representing them, so you can't build them into a traditional statistical model. It's not that you can't make very good educated guesses, but I would call them educated judgments, as opposed to firm econometric forecasts. So now is the time for good informed thinking without rushing to more formulaic models.