Mortgage Modifications Will Not Solve the Housing Problem

by: Dr. Bill Conerly

The White House has announced new plans for mortgage modifications. Good summary at Calculated Risk, with a follow-up.

Helping under-water homeowners will not solve the national housing problem. When thinking about how the residential construction industry will affect the economic forecast, simply ignore this program. The fundamental problem is not about mortgages, but about the total number of housing units relative to our population. Here's the housing vacancy rate chart (again):

Housing vacancy
Both rental and owned vacancy rates are too high, well above historic norms. If we keep some families in their owned property, they don't have to move to rentals. If we offer a first-time home-buyers tax credit, we can move some families out of rentals into owned housing. But we cannot do any more than push the peas around on the plate.

Wouldn't mortgage modification at least be a step? Not for the national housing market. First, lower rental occupancy will push some landlords into foreclosure. Second, an improving owned housing market will lead to condo conversions. Many would-be flippers (who learned that flipping is now flopping) who couldn't sell the condos or single-family homes are renting them out. Just as soon as the market for properties improves, they'll push out their tenants and put their properties up for sale. There's enough flexibility between the rental and owned markets that any improvement in one sector will become diffused throughout the entire housing market. Again, shifting people out of one category into another does not help.

What will help? The standard old answer is population growth. More people means more demand for housing. We simply built ahead of our needs and now are waiting for our needs to catch up.

Second, an improving job market will help some young adults move out of their parents' homes, and others will be able to afford to live without roommates. That will stimulate the demand for housing units in total, and some of that demand will spread over into the owned housing market.

(By the way, about two thirds of occupied housing units are owned, one third rented. Data from the Census Bureau's Housing Vacancies and Homeownership page.)