THE PROBLEM WITH HOUSE PRICES / THE NEW YORK TIMES EDITORIAL

Editorial

The Problem With House Prices

By THE EDITORIAL BOARD

   

Credit Alexis Beauclair       
 

I
n the housing bubble, prices rose beyond all reason. In the bust, they fell even more than they had risen. For a long time since then, they recovered in fits and starts.
 

Recently, however — as is fitting in a saner real estate market — house prices have been rising in line with personal income and other economic fundamentals in local areas. But a return to a more stable growth pattern does not mean that housing will once again become the economic engine it was in the decades before the bubble.

 

One reason is that millions of homeowners still owe hundreds of billions of dollars more on their mortgages than their homes are worth. Those borrowers tend to live in areas that were hard hit in the bust and still have weak economies, a mix that makes it nearly impossible to outgrow earlier losses.

 

Their plight hurts the broader economy, because underwater homeowners are less likely to spend, relocate or build wealth.

 

One solution for many troubled borrowers would be to modify their loan terms. But as Gretchen Morgenson of The Times reported recently, banks are still unwilling to modify loans, despite rules imposed by regulators and legal settlements after the bust that were supposed to make it easier and fairer for borrowers to obtain relief.

 

The banks say they have broken no rules. But lawyers for borrowers, as well as a new report by the inspector general of the government’s main housing debt-relief program, indicate otherwise. In particular, it appears that banks are still able to make more money by delaying or denying modifications — and thereby earning more fees and interest — than by granting new loan terms.

 

Another reason that housing cannot propel the economy the way it once did is the growing inequality in incomes. That home prices are increasing in tandem with income is a sign of stability. But only investment income has been rising steadily in the recovery, while wages from work have stagnated.

 

One result is that buying a home is still out of reach for many working people, particularly those who would have been first-time buyers in a healthier economy. Another result is that builders have largely focused on higher-end homes, leading to a low inventory of new starter homes.

 

The situation is evidence of the unrepaired damage from the bust. Aggressive intervention to provide debt relief and create good jobs is still needed, but has not been forthcoming. It is not too late for remedial steps, if only the political consensus to take them could be found.