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The Lost Housing Decade?; Renting Versus Buying; Ditching Your Mortgage; Housing Recovery in Sight?

Aired July 2, 2011 - 09:30   ET


CHRISTINE ROMANS, HOST: The first good news in months for homeowners, a rare sign of life in the spring selling season.

Good morning, everyone. I'm Christine Romans.

But the fact remains, the value of your biggest asset is down some 30 percent over the past few years. The housing market has changed, and so have you. What you need to know if you own a home, want to buy one, or rent.

Plus, is it ever OK to walk away from that mortgage even if you can afford to pay?

Let's start with the American dream of owning a home. If you're a buyer, it's a dream market, but only if you can get the loan, with 10 of the nation's largest mortgage lenders denying almost 27 percent of loan applications last year. That's up from 23.5 percent in 2009. This is according to "Wall Street Journal" analysis. If you're a seller, it's a nightmare.

Home prices rose slightly for the first time in eight months, this according to the most recent S&P Case-Shiller 20-City index. Now, that's the sign of life this spring I was telling you about, but don't get too excited. Prices are down 32 percent from their peak set in 2006. The chart tells the picture there. Homeownership also is at the lowest level now since 1998.

Chris Mayer from Columbia University School of Business. Chris, is the worst behind us here?

CHRISTOPHER MAYER, COLUMBIA SCHOOL OF BUSINESS: Depends where you live. I think in some of the coastal markets in coastal California, the northeast, I think we really are starting to see things turn around, and, you know, places like Atlanta. But if you're in Florida, if you're in Nevada, if you're parts of California, and, you know, Arizona, I just - it's hard to say that the worst is behind us.

ROMANS: All real estate is local. You're absolutely right. I mean, taking the average home price in America is like taking the average temperature in America. I mean, it's different, depending on where you live, and I get that.

When we look at the way home ownership has declined to 1998 levels, not necessarily bad news, really because maybe homeownership was bumped up too high for false reasons.

MAYER: Yes, and I think we now understand what I think we didn't understand for a long time, which is not everybody should be a homeowner, and, you know, eventually between 80 and 90 percent of Americans will own a home. But I think many of us in our 20s, either we move around a lot, maybe we, you know, took on a little too much debt, student loans, other things, you know, aren't in a position to own a home, and I think we shouldn't put some of those people into homes that they're owning. We should find ways for them to rent.

ROMANS: I'm looking at a chart right now that shows recent recessions and then shows how homeownership has fared, and really for 10, 20, 30 years, no matter what, homeownership levels would continue to move higher until that peak in the 2000s, amid very, very easy credit. Do you think more people are going to continue to shy away from buying a house because either they can't get the loan, as we saw in other statistics, or because they've changed their view of the American dream?

MAYER: Well, I think that, you know, one of the interesting facts is if you look at people who went through the Great Depression and owned stocks, people who owned stocks in the Great Depression and lost all their savings, invested less in stocks for the rest of their lives.

ROMANS: Right.

MAYER: So there is a little bit of, you know, risk, I think, that, you know, some of the people that have been really burned in housing are going to sort of think that they just don't want to own a home for a long time.

There's a big but there, which is, at the same time, you know, owning a home is really a sign of financial stability, if you're able to do it, and so I don't think it's going to be as bad as, you know, the great depression evidence of people who just never invest in the stock market again. But, you know, hopefully people are going to be a little more responsible about that decision.

ROMANS: We can only hope.

Jim Carr from the National Community Reinvestment Coalition. You know, communities need the housing market to recover, Jim. I mean, state and local governments, they're expected to shed more than 100,000 jobs in the third quarter. Without those property tax revenues, they can't fund operations. Communities are facing an uphill battle here if people can't buy homes, Jim.

JIM CARR, CHIEF BUSINESS OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION: Right. Well, you're absolutely right, and the problem is not is if the somehow things are leveling out. We're on route to another two million foreclosures this year and probably have at least another two million in the pipeline on top of that.

And so, despite the good news that - that you talked about earlier at the top of the show, the reality of it is that the more likelihood is that home prices are going to continue to slide through the end of this year. One good note is nice, but it doesn't make a - you know, a song. And so I think there's real trouble in the housing market in the years to come.

ROMANS: Margaret Kelly, you're the CEO of RE/Max. You know real estate from the frontlines. Do you think there's real trouble for the housing market to come or do you think that we're reaching a bottom here?

MARGARET KELLY, CEO, RE/MAX: I think we're reaching a bottom. Right now we call it kind of a saw tooth recovery. You're going to see it up and down, kind of bump along the bottom for the next year or two.

But, unlike the - the Case-Shiller report, RE/Max does a housing report, and Case-Shiller is - it's a three-month average. The data that we're looking at from them is from April.


KELLY: RE/Max looks at current data, and what we've seen is the last three months that we've seen an increase in the prices and three of the last four months an increase in transactions, month to month. That's great signs.

ROMANS: All right, Jim, Chris and Margaret, stick with us because we've got so much more to talk about housing because the big question in an unhealthy housing market is do you rent or do you buy? What to do and which makes sense for you and your family? That's next.


ROMANS: Can a home be a man's or a woman's castle even if he or she doesn't own it? Yes, if the latest wave of renters is any indication. Even those who can afford to buy are opting out and renting instead. People like Xander Clarke.


XANDER CLARKE, RENTER: If I own my own home, I wouldn't have any of these amenities.

CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT (voice-over): Like a full-service building and outdoor pool. But, amenities aside, 23- year-old Xander Clarke is at an age when some people consider buying their own homes.

CLARKE: I've thought about investing and - and purchasing a home. My father purchased a home when he was my age. So when I knew I was going to move to Baltimore, I looked at properties, but I just knew that in my line of work that I would need to be relocatable.

ROMANS: And as the housing market sinks, Xander's seen friends who own homes struggling. CLARKE: It's been on the market for a year, and, you know, they're not getting the price that they're asking for. And that's scary, to think that you have to keep lowering the price.

ROMANS: The numbers tell the story. Homeownership has dropped steeply from its peak rate above 69 percent in 2004, to the current just above 66 percent. Homeownership is now at the level it was in 1998. But even those who have the money and could withstand the tougher credit checks are opting not to buy but to rent instead.

Chris Mayer researches housing for Columbia University Business School.

MAYER: I think a lot of people are looking and saying, you know, even if I can, you know, make the down payment, even if I have the income and I've got the credit, is this really the best time to jump into the market?

ROMANS: Doug Bibby is President of the National Multi Housing Council.

DOUG BIBBY, PRESIDENT, NATIONAL MULTI HOUSING COUNCIL: We're seeing some opting not to buy right now, even though they could afford it, because some are betting on housing prices falling farther. There are some predictions they will fall more. There are others who are betting on the ability to - to change.

ROMANS: And with the jobless rate at 9.1 percent, being able to pick up and go where the jobs are is critical.

CLARKE: I prefer to rent. I like the flexibility that comes along with renting.

ROMANS: The face of a new generation of renters, and perhaps the future of home-dwelling in general.

MAYER: I think there's a lot of evidence that people need to have down payments, and so we should have viable options for people who are not in a position in their lives to be owners. And there's nothing wrong with that, and hopefully we'll, you know, start to eliminate some of the stigma and so when people buy, they'll buy for good reasons.


ROMANS: Xander Clarke works in Human Resources for a big retailer. If he gets a promotion he wants to be able to take it and move cross country and not be tied down, limiting his mobility at work. That's something that a lot of young people are thinking about.

So which is your American dream? All those amenities and that flexibility, or the responsibilities that come with homeownership, especially when prices are bottoming, at best.

Chris Mayer and Jim Carr are back with me, along with Margaret Kelly. Chris, in the piece we just watched, you say renting is a viable option for those who can't afford homeownership, and, in fact, the numbers prove it. Renter growth has outpaced household growth, new household creation for four years in a - in a row. But would there be long term effects economically if we become a nation of renters, or at least a more - a larger percentage of renters?

MAYER: I don't - I don't - you know, homeownership is a great thing in terms of if you're in a stable place to do it, but there's no evidence to suggest that well-run rental communities, well-run rental properties are bad for locations in general. And I think we are going to see - you know, I was just down in Atlanta the beginning of this week and, you know, a lot of the sales are going to people who - investors who are looking to rent properties, single family homes out.

ROMANS: Yes. And as we know, the numbers are showing, that a third of - of home sales are - almost a third - are investors, and sometimes those are professional investors. It's not like you - you and me, or I guess me, getting in and buying a new home.

You know, Margaret, I want to ask you, you run a real estate company, and we've heard so long from - from people who make their money selling real estate that it's not going to get any worse. The bottom is almost around the corner.

What does it feel like or what do you think about this new talk that renting is a better option for some people, they need to build their cash cushion and the housing market isn't good for them right now?

KELLY: Well, there's quite a few things. One is the confidence that you have in your income, employment and so on, but renting versus buying is a personal decision based upon your personal situation. It's still the American dream, and many people want it.

You're right, there are about 20 to 30 percent of investors out there who are - are buying homes, and a lot of them actually are someone buying one home in their neighborhood and they're going to keep it and rent it. But if you look at the number of - of families that have been foreclosed upon, they can't buy homes now. They need the rental properties. That's why you see a big increase in the whole rental market.

ROMANS: Yes. Jim, we just showed a map that showed that most of the country, the homeownership rate is declining, parts of the Midwest, New York State. Some other places you see it going up.

Do you believe, Jim, that owning a home, the classic American dream, is still the better way to go and that, well, we need - do need to ditch the whole idea that houses never go down in value? We got to throw that out of the window. But is homeownership good for communities?

CARR: Yes, absolutely. There have been a number of studies that show that there are significant differences in the behavior of owners versus renters. First of all, just starting with improving their own properties as well as making sure that the neighborhoods remain, you know, really viable, that they have the right amenities, things of that nature.

But even going beyond that, there's nothing wrong with being a renter, but I think it would be unfortunate if, in fact, we move forward with public policies that really didn't promote homeownership because it's important to remember that for more than 50 years, the American home was not only sort of the centerpiece of where one lives, but owning a home was the number one source of wealth accumulation for the typical American household. And if that's lost the question is what fills that gap?

And the truth is, and opinion polls show, that most Americans still aspire to own a home, including the majority of Americans who already own would say they would buy again. So the challenge is for us to fix this housing market that has been in disrepair for several years now and really get it back on track so that those who really want to own because of the inherent benefits of owning a home, wealth creation, neighborhood stability and others, can enjoy that and those who choose to rent can rent.

ROMANS: Chris Mayer, thanks for joining us. Margaret, Jim, stick around.

More than a million homeowners are doing it, walking away from the home they own and walking away from the debt that comes with it. But is it the right thing to do? We'll check it out, next.


ROMANS: The Mortgage Bankers Association says nearly 13 percent of all homeowners with mortgages are either behind on their payments or they're already in foreclosure. The stress of mortgages gone bad is leading to a new trend calling Strategic Defaults. Now, these are people who can pay their mortgage, but they stopped because the value of the home is worth less than the loan.

Who are these people? Well, you might be surprised. The credit bureau Experian this week tells us the average strategic defaulter has multiple mortgages; has higher origination balances; a third of them, almost, live in California; and Experian also found they have higher incomes, higher credit scores and higher financial literacy.

So, is it OK to just walk away from the mortgage?

David Flores joins me now. He's a credit counselor at Greenpath Debt Solutions. David, help me understand the two reasons why you say people do this?

DAVID FLORES, NY REGIONAL MANAGER, GREENPATH: Well, the - the two reasons are these - one, to try and leverage with the bank, to work with them on a modification.

ROMANS: They say I'm walking away unless you can work with me.

FLORES: Right. Right, right. And then the other reason is simply because they want to be able to take advantage of the slow, drawn out foreclosure process, live in a home -

ROMANS: For free?

FLORES: For free. For free.

ROMANS: In some cases people rent - they own a different home, they're renting out the other home that they're not paying the bills on, but still collecting rent.

FLORES: Right.

ROMANS: And that's something that's happening too.

Also, one thing I found interesting from the Experian data is that these are people with higher credit scores, higher incomes. They would seem to have better financial literacy, so that's why it's a strategic default.

FLORES: Right. Right. And I - I think the - the information out there, there's a lot more information out there regarding what the banks - what you need to do in order to qualify for a loan modification, and so there are a lot of attorneys out there, organizations, who are - who are feeding that information.

ROMANS: Oh, yes. There's a cottage industry of, you know -

FLORES: Yes. Yes.

ROMANS: -- we'll take your money to help you -

FLORES: Right.

ROMANS: -- strategically default.

Margaret Kelly from RE/Max, you're still with us. Margaret, you're also on the frontlines. What do you think has to be done to keep people who want to stay in their homes in their homes, paying their bills, and not strategically defaulting? Or is it ever OK to walk away from your financial obligations to the bank if there's no hope - you're so underwater, there's no hope you're ever going to get out of it?

KELLY: Well, that's a - that's a moral and ethical question that I think each person has to - to address. But what we need to do is loosen up the - the jumbo mortgages and allow the higher-end mortgagees to be able to adjust their mortgage.

It's - it's kind of interesting, you talked about it's the higher end. For those people with mortgages of 50,000 or below, only six percent strategically default. If you are over a million dollars on your mortgage, 33 percent are strategically defaulting.

ROMANS: Why is that?

KELLY: Because more than likely they've paid way too much for their home. It's - they don't see that they're ever going to get out of the negative equity position, and they have - as you said, it is strategic. They have thought about it and said, it is better to walk away than to sit here and continue to make payments, because I will never get the money out of this home.

ROMANS: You know, Jim Carr, I want to bring you back into the conversation, because one of the things here is that subprime borrows, many have already been blown out and foreclosed in the past few years. They're on the front end of the whole housing crisis.

It's ironic now, the people who are still living in their homes and not paying any bills are people who have high credit scores and higher financial literacy.

CARR: Right. It's very interesting, and I think the term "strategic" is really key here because a lot of people really, you know, have a perception that maybe those are lower income households, but really it's higher income households.

And probably one of the reasons they do it in addition to those reasons that have already been given is that they have other wealth that they can rely on to continue to function in the economy, even though they have this serious ding against their credit score, because a strategic default is going to hurt you with respect to your credit score.


CARR: And, as you know, you need a credit score for practically everything these days. You can't afford to lose more than 100 points and continue, unless you've got a fair amount of assets that you can rely on.

ROMANS: But here's the -

CARR: The other thing that -

ROMANS: Go ahead.

CARR: I was just going to say, the other thing, it's important to recognize that in many markets, consumers are upside down not by five or 10 percent, because that's not really where the problem is, it's in those markets where consumers are upside down in their loans by 25 percent or even 50 percent. And, in those cases, many people are walking with away simply because they can't estimate the day of which their home will ever be worth what they paid.

And so, again, it's - it is a moral issue. It's also a legal issue. But the reality of it is, if you owe 50 percent more on your mortgage than the home is worth, a lot of folks are saying, well, I'm - this is clearly just a dead loss. I might as well take the ding on the credit score and - and go forward from there.

ROMANS: Right. Well, especially if you have multiple mortgages, which is what the Experian - Experian data found, so if your credit score is going to take a hit, you're already living in one home. It's not like you're looking for another mortgage to live in your house. You're living in one house.

And also, they found that 90 percent of these people were paying all of their other bills. All of them. So from the - from the credit rating point of view, your score falls, but with an asterisk, because you're paying all the other bills. That makes you still a good candidate for all of the credit products that the banks are trying to sell you, Jim.

CARR: Well, not necessarily. You still - strategic default means you - you intended to do it. You could have paid that bill. So you're going to be treated a lot less favorably by the credit scores than you would if, in fact, you defaulted because you literally had hard times, you - you know, you lost your job.

The other thing I think it's important to recognize is that depending on whose numbers you're using, the number of households that are upside down range from between 23 percent to 28 percent. That's a huge number.

So further drops in house prices, we - you know, the conversation we were having earlier, if that happens, if the potential for more strategic defaults is - could, in fact, grow.

ROMANS: OK, guys, stick with me for a minute because there's so much more to talk about. Jim, Margaret, David, stay with me.

What will it take then to fix the housing market, to get home prices stable and rising again? And when will we see a real recovery? Real answers, next.


ROMANS: Before housing recovers, we have to have confidence, but confidence is in short supply. Fifteen percent of Americans think the housing market will recover next year. That's 15 percent. Twenty- four percent say 2013. And you can see from this pie chart that most of them, 54 percent, think the housing market wouldn't recover before 2014.

Jim Carr, can the government - should the government fix the housing mess?

CARR: Yes. So there are three components of this housing market problem.

So first is the foreclosure crisis that continues, the federal interventions so far have just been woefully inadequate, and there's a lot more that can and should be done. And, in fact, going back to our conversation on strategic default, the failure of a lot of these loan modification programs is one of the reasons why people are going forward with strategic defaults.

The second is that we need to repair the housing market, meaning put new rules in place that make sure that loans are sustainable. But we need to make sure that we don't put rules into place that are so onerous, that they go beyond repairing the market and really dampening further housing - home buying demand, because that will simply slow the housing market's recovery.

And the third piece is unemployment. Unemployment has been the largest driver of foreclosures for the last two or three years now, and so failing to get America back to work is going to be harmful to the housing market going forward.

ROMANS: You know, Margaret, we know the solution to the housing crisis. It's confidence. Only, we don't know what it's going to take to get the confidence back. Maybe knowledge or financial literacy is part of it.

The Consumer Financial Protection Bureau has unveiled the "Know Before You Owe." Take a look at this. These are two prototypes of a simple, two-page mortgage form that replaces the existing lengthy, often confusing disclosure documents.

Margaret, is this the clarity we needed for borrowers five years ago, I guess, and - and does this go toward helping us get some help to the housing market again today?

KELLY: Well, unfortunately, years ago, the lending practices were way too loose. You could get a mortgage without anything down, without proving income. I think the pendulum has swung too far the other way, where - where lending practices now are way too tight.

We have to get back to common sense, good lending standards. We have to increase confidence, and so the best way to do that is let's get private sector jobs. Let's get people employed again, because people who have jobs, they buy homes, they stay in homes.


ROMANS: And people who are confident in their job (ph).

KELLY: Absolutely, that they know they're going stay in it.

And the third is, this - this whole distressed property glut that we have or shadow inventory, it is going to take a few years to work through the system, but once those are gone, we are back to a normal housing market.

ROMANS: You know, David Flores, you counsel people who are trying to get out of debt, and they're trying to triage all of these bills and decide what to do and whether they should rent or buy and if home prices are going up or down. David, is it jobs the thing that we need to - to really help this situation?

FLORES: Well, I think it's a combination of jobs and - and, as you said, financial literacy. I think a lot of consumers got into mortgages that they simply could not afford, but didn't understand that they couldn't afford them.

ROMANS: Do you like that two-page document?

FLORES: I do like it. I would like, obviously, as a financial counselor, for the lender not to be the one to go over - or only the lender go over that information, but a third party who is, you know, neutral to the situation, so that they can give them real answers and real advice.

ROMANS: All right. David Flores, Margaret Kelly, thank you so much for joining us, as well as Jim Carr. Nice to see all of you today.

And let's keep talking about this so that we can really understand what's happening in the housing market. I mean, it's so important. It is part of the American dream, no question about that. Thanks, everybody.

That's going to wrap things up for us this morning, but the conversation continues online. Please send me an e-mail with your thoughts, your questions to Also, find me on Facebook and Twitter, @ChristineRomans. We reply to all of these.

I want to know what you think about the housing market, confidence, jobs, education, and the American dream.

Back now to "CNN SATURDAY" for the latest stories making news. Have a great weekend.