While easy monetary policy and a large fiscal stimulus have limited the economic downturn and helped generate modest growth, few believe the economy can grow fast enough to reduce unemployment without the recovery of the housing sector. Yet, no such recovery is in sight. As of late December 2010, the headline story was “Housing Recovery Stalls: Fresh Fall in Home Prices is Headwind for Economy.”1 Construction output remains 30 percent below pre-recession levels and is no higher today than it was a year ago (about 30 percent of all lost jobs were in the construction industry). The unemployment rate among construction workers is about 19 percent, double the national average. There are still 7 million homes in foreclosure or with mortgages that are 90 days delinquent. House prices continue to stagnate.
So far, federal initiatives aimed at shoring up the housing sector have cost tens of billions of dollars but have been ineffective and poorly targeted. The tax credit for homebuyers may have sped up some home purchases, but it did so at a high cost and with benefits flowing to many high-income families. It subsidized purchases that would have taken place without the credit, resulting in a cost to the taxpayer of $43,000 per new home purchased and a total budget cost of $15-20 billion, which was twice as much as Congress expected. President Obama’s Homeowner Affordability and Stability plan has reached only a small percentage of eligible homeowners.
The potential benefits of increasing the demand for owner-occupied housing are enormous. A rise in home prices would reduce the number of homeowners who find their homes worth far less than their mortgages. It would discourage these “underwater” homeowners from walking away from their mortgages; allow more families to refinance at low interest rates, thereby reducing the rate of foreclosures; and, ultimately, it would generate new construction jobs and spur associated job growth. Increased home values also can play an indirect role in job creation, since more small business owners would again be able to use their home as collateral for loans to maintain and expand their business.