USC Price School of Public Policy

Richard Green Road to the White House Lecture

Knowledge in Action:

Green Addresses Impact of Housing Market on Elections

By Matthew Kredell

Richard Green SPPD’s Richard Green, left, with Unruh Institute Director Dan Schnur, speaks at “Road to the White House” event at Tutor Campus Center. Click here to watch full presentation »
Photo by Tom Queally

Does the economy need to rebound to repair the housing market or does the housing market need to be fixed to improve the economy? It’s the sort of chicken-or-egg scenario that keeps policymakers up at night.

Richard Green, USC School of Policy, Planning, and Development professor and director of the USC Lusk Center for Real Estate, said history has shown that housing tends to lead the business cycle. Housing recovers and the economy follows.

That realization makes housing a major issue to consider for national and statewide elections, Green indicated Sept. 14, as part of the “Road to the White House: Politics, Media & Technology” series — weekly public conversations on the upcoming elections on by USC’s Bedrosian Center on Governance and the Public Enterprise, Jesse M. Unruh Institute of Politics and Annenberg Center on Communication Leadership and Policy. The Bedrosian and Lusk centers are housed within SPPD, with Lusk also located in the Marshall School of Business.

Daniel Schnur, director of the Unruh Institute, moderated the event and took questions from students in the audience to direct to Green.

Foreclosures were reported on 228,098 properties in the nation during August, with California second among states behind only Nevada.

Green said he is surprised the total isn’t even higher. In California, 33 percent of homeowners are underwater on their mortgage. Just like in the stock market, people don’t like to give up on a losing stock and admit a bad decision.

This predicament was set up when, before housing prices peaked in early 2006, people who made $35,000 a year were being set up in $400,000 houses. They’d get mortgages where sometimes they didn’t have to make a full-interest payment for the first five years due to irresponsible lending.

“I think we have a moral obligation to make sure people not only can buy a house but can stay in a house,” Green said. “We forgot that along the way.”

About 85 percent of Americans own a home at some point in their lives. However, it’s not a step that should be taken lightly.

“The lesson I learned as a former campaign speechwriter is what sounds really good from a politician on a stump is that part of the American dream is everyone should own their own house,” Schnur said. “The reality is a little more complicated.”

Green suggested that people shouldn’t buy a home if they plan on living there less than five years, or want to remain mobile for a job.

That doesn’t mean renting is a great option. Rental affordability has become a problem because, while rents adjusted for inflation increased only by about 5 percent over the past 40 years, adjusted income of renters has gone down by about 30 percent over the same time.

Green does see reason for hope on the housing front. Affordability is at historic levels because of low interest rates. In Los Angeles, Green said that land typically is worth two-thirds the value of a house. This ratio increased to 80 percent during the worst point of the correction but is now down to about 60 percent, a bit below the long-term mean. It’s an indicator that fundamental value of homes is now close to where it should be.

How to handle Fannie Mae and Freddie Mac will be a key issue for political candidates to address. The popular political move of the day is to call for the halt of implicit guarantees that the government will bail out the mortgage institutions. Green disagrees and made that his No. 1 point when testifying in front of the Senate Banking Committee in September.

“We’re better off recognizing that they’re there no matter what,” Green said of the bailout guarantees. “We like to think that we’re these free-market people, but this country was born with a bailout. When the federal government assumed the debts of the states in the continental army, we were a bailout nation from the beginning. Alexander Hamilton used it as a method to tie the union together.

“When big institutions fail, we bail them out. It doesn’t matter if it’s a Democrat or Republican who’s president. So let’s just say that we’re going to do it and price it in.”

Green presented three possible angles for presidential candidates to take on housing and mortgage issues. The first option, full privatization, he dismissed as an unrealistic idea. The second choice, a catastrophic guarantee protected by capital requirements and an insurance fund, Green called intriguing but he’s not sure how it could be done.

Green said the most likely option, which Obama is pushing, is a broader middle-class guarantee where the Federal Housing Administration would serve a broader market with its mortgage insurance programs rather than only low- and moderate-income families. Of the two highest-polling Republican candidates, Green believes Mitt Romney also would likely go down this route though he is not sure about Rick Perry.

“As an international student who grew up in China, I didn’t have that much knowledge of the housing problem in the U.S.,” said Xin Huang, a second-year master of public administration student. “From this event, I got a better understanding of the general conditions in the U.S. I think it’s a very important issue for young people to consider and a good reflection of the economy.”