October 18, 2012 6:53 pm

Building recovery

Nascent US housing revival is no cause for complacency

The US housing market has shown increasing signs of life this year. With a 15 per cent spurt in new starts in September, it is safe to declare a recovery is under way. The latest data are also potentially helpful to Barack Obama’s re-election chances – and offer good prospects for whichever candidate takes office for the next four years. Yet a technical recovery is not the same thing as a strong one.

Roughly a fifth of US homeowners are still trapped in negative equity, where their mortgages are worth more than their homes. And large parts of the house-buying population remain shut out by hyper-cautious banks. There is still a need for more effective measures to bridge the difference. The speed and quality of the broader US recovery will partly depend on it.

The timing could prove critical. A sustained housing recovery would help fill the gap caused by the global slowdown, which will limit the role of exports in the US economic recovery. By putting more money in people’s pockets and creating construction jobs it would also help contain the costs of hysteresis, in which the gradual deskilling of the long-term jobless limits future growth capacity.

All this should be happening faster. So far the recovery has largely been driven by the Federal Reserve’s loose monetary policy, which has brought mortgage costs to new lows, and also by demographics – the US population grows by 3m a year – which means housing supply is increasingly trailing demand. But obstacles remain in the way of sustained expansion.

This week Bill Dudley, chairman of the New York Fed, complained that banks were failing to pass on the benefits of the Fed’s third round of quantitative easing to less creditworthy borrowers. The housing finance market is dominated by an ever-smaller handful of banks – Wells Fargo accounts for a third of originations alone.

Likewise, the regulators have imposed too tight a straitjacket on the banks. Fannie Mae and Freddie Mac, the mortgage underwriters, insist on including a warranty forcing originators to buy back loans that go bad. This also applies to restructured mortgages, which deter banks from negotiating lower interest payments. Nor is it an easy process for customers or banks to renegotiate the principal.

Too much of Washington’s approach remains penny-wise and pound-foolish. Whoever wins on November 6 needs to ensure the regulators do not act as a drag on the housing market. The strength of the recovery could depend on it.

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