Housing picks up, but bets are off, economist says

Karl E. Case, the Katharine Coman and A. Barton Hepburn Professor of Economics at Wellesley College and co-creator of the widely used Case-Shiller Housing Price Index, sees “some little signs out there” of recovery in the housing market, which could bode well for the economy as a whole.

If housing recovers, the value of the so-called “toxic assets” on banks’ balance sheets would go up, and that would help the banking industry recover, he said.

While he assigned a 20 percent probability to his prediction that housing seems to be stabilizing, he added that he “might not bet on this at Foxwoods” because of the unpredictability of current events.

Case spoke to a nearly full house at Konover Auditorium at the invitation of the Association of Graduate Economics Students (AGES), which each year invites a well-known economist to its Distinguished Speaker series.

The current recession will be worse than the 1982 downturn, Case said. This time, the housing bubble and related investment practices created what he called “a Ponzi scheme, only (Bernard) Madoff wasn’t involved in it.”

For 30 years, from 1975 to 2005, housing prices steadily increased. In the third quarter of 2003, when mortgage rates dipped to 4.6 percent and the Federal Reserve increased the money supply, total mortgage refinancing reached almost $1 trillion, Case said.

This led to a tremendous expansion in the mortgage business and “got Wall Street involved in doing mortgages – and it became addictive,” Case said.

Companies began using what he called “ridiculous underwriting standards.” Yet the bulk of the bubble was caused by “people believing in what they were doing,” he said, based on the 30-year history of housing price increases and that “Rock of Gibraltar,” the single-family mortgage.

When the housing market turned downward in 2005, collateral disappeared and banks were “spooked” and called in loans, which they could not find a market for, because “everyone was spooked.”

Two things are going on to clear the housing market, he said: Some sellers hold back from the market because they see prices dropping, and yet, at the high end, some buyers with deep pockets pay top prices. At the lower end, the market experiences foreclosure “fire sales.”

Photos by economics graduate student Xiaoming Li

National indexes show housing in some markets, such as California-Florida-Arizona, dramatically devalued, he said – housing prices in Phoenix are down 48 percent.

But in New England, the drop has been far less severe, with the Boston area showing a 17 percent value drop. That’s exactly where New England was in the last housing downturn, he said. The difference this time is the additional pressure of a recession.

Still, February figures showed the home price index in New England increase 2 percent, he said; new home sales were up 9 percent, existing sales were up 5 percent, and housing starts were up 22 percent.

The current market has wide variations, he said – the differential from zip code to zip code is higher than it has ever been.