Dimensioning the Housing Crisis

Laurie S. Goodman

Financial Analysts Journal, 2010, vol. 66, issue 3, 26-37

Abstract: The author argues that more than one borrower in every five could face foreclosure absent stronger policy measures. The solution is to (1) reduce the housing supply through a modification program that explicitly addresses negative equity and (2) increase housing demand by expanding the availability of credit to investors.With the apparent stabilization of home prices and the increase in existing-home sales, many investors believe that the housing market has bottomed and is beginning to recover. I believe that such optimism is premature. To be sure, there are many positives in the housing market: Prices have fallen significantly, housing is more affordable now than at any time in the past two decades, and the tax credit for first-time homebuyers has helped spur purchasing. Investors, however, are overlooking two critical factors: (1) the size of the “housing overhang” (i.e., the number of loans in delinquency or foreclosure) and (2) the borrowers with negative equity who are likely to default.I argue that the solution to the current housing crisis is to (1) reduce the housing supply through a modification program that explicitly addresses negative equity and (2) increase housing demand by expanding the availability of credit to investors.

Date: 2010
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DOI: 10.2469/faj.v66.n3.6

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