While 2014 will be a good year for the economy, the once-rollicking housing market will be more constrained, USC housing economist and former Obama administration insider Raphael Bostic says.
New loan rules and higher interest rates may put a damper on homebuying next year, Bostic said.
Bostic left Washington, D.C., last year and returned to Southern California. In an interview with the Register, the former assistant U.S. secretary for Housing and Urban Development discussed the market, national housing policies and the future of mortgage giants Fannie Mae and Freddie Mac.
Q. What’s the outlook for housing and for the economy?
A. I don’t do much formal forecasting these days, but my sense is that the economy has finally turned a corner and the headwinds are mainly in our favor. Businesses are hiring, consumer confidence is rising, and statistics across the board are signaling sufficiently solid growth that the Fed will be pulling back on its monetary supports. Even Washington politicals seem to be getting on board, as a longer-term budget deal would create certainty and remove a potentially big obstacle to strong economic performance.
The housing market should have a good year as well, but not as good as the overall economy. For the next few years, housing will be working toward a “new normal.” Interest rates will start to rise and new regulations will start to have measurable effects on bankers, brokers, and homebuyers. These will result in a more constrained market, but one where the excesses seen in the run-up to the last crisis are much less likely to occur. This is a good thing.
Q. What surprised you the most about real estate during the past year?
A. What’s been surprising is how relatively stable the market seems. There have not been significant jumps and declines through the year. Maybe this is a function of so many people waiting on the sidelines to see how the market shakes out before entering, which has kept inventories low.
Maybe it’s that people are more cautious in considering a large investment like a house, which has kept demand from spiraling upward. But it doesn’t feel like we are in a transition market, even though we are.
Q. Has the housing landscape changed for good since the crisis?
A. If there was a silver lining from the housing crisis, I think it was that it made people once again understand that there is risk involved when one buys a house. Perceptions about housing had gotten out of balance. The investment motive for housing was being overemphasized relative to the consumption motive. This was leading people to take excessive risks.
We are far from that now, and people are viewing housing differently and more prudently.
Q. Do you think Freddie and Fannie need to be reformed, or scrapped?
A. Reformed. The U.S. mortgage market is the deepest and most diversified financial market in the world, and this is because of how it is structured. For one, we are able to have a widely available 30-year fixed-rate mortgage, which is a popular and consumer-friendly product. For another, we have on-demand mortgage financing. We never worry whether capital will be available when we want to buy or refinance a home.
Whether they are called Fannie or Freddie or something else, we will need institutions that do these functions. The biggest step to be taken is to move the government guarantee well behind private capital. This will make mortgages more expensive, but also protect the taxpayers in the event of another housing downturn.
Q. How would you rate the Obama administration’s effectiveness in addressing the housing crisis?
A. On balance, I think we did a very good job responding to the housing crisis. This was an unprecedented economic shock, and there was really no road map for how to best deal with it. The policies put in place to address the free fall in housing prices did their job. Prices stabilized, housing-related government bailouts have been repaid, and time was bought for the economy to regain its footing.
That said, there were things that could have been done better. The design of some of the programs was so complex – too complex – that it made it hard to get them implemented quickly. Expectations for what should occur and when were set unrealistically high, which has caused an under-appreciation for what did happen.
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