The Vexing Dilemma of the Housing Market
It will be years before most of America sees gains in home prices again that match historic norms. There are too many problems to resolve.

The country’s persistent housing woes have Washington flummoxed. Some four years after home prices started to plunge, they continue to sink, and foreclosures to rise. As a result, the building and real estate industries remain sluggish, and consumers…skittish.
There simply is no “fix” for the housing market, and new policy questions are just making matters worse. Mortgage modification programs have proved to be of very limited help. Relatively few homeowners are being assisted, and many of those who do manage to get their loans restructured only wind up defaulting again. State probes into banks’ shoddy paperwork on foreclosures are also postponing the market adjustment that’s needed. Banks, litigators and regulators are at a stalemate, pushing the tidal wave of foreclosures — another 2 million this year, following 2 million in 2010 — further and further into the future.
The desire of policymakers for long-term financial reforms is complicating matters even more and adding to the short-term market pain. Bank regulators want tighter lending rules — making permanent the requirement for down payments of at least 20% and setting high income and credit hurdles in an attempt to prevent a recurrence of the recent boom and bust. But that kind of permanent tightening would bar many potential home buyers from getting financing and further crimp the market.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In addition, most in Congress want to curb Fannie Mae and Freddie Mac, the quasi-governmental mortgage companies, arguing that the giant duo risked too much taxpayer money on iffy mortgages. But doing so at this point would bring new risks to a still fragile financial system. As some reformers suggest, a gradual reduction in the maximum loan that could be backed by Fannie and Freddie might generate a private secondary market. But no one knows how quickly or smoothly it would come about. After all, investors, bankers, lawyers and others are still untangling the knots in the $2-trillion secondary market spawned during the most recent housing boom.
And the fact is, Fannie, Freddie and the Federal Housing Admin. back 90% of new mortgages today. Dramatic, swift reform of their operating rules would likely wind up weakening demand. It would surely limit options for lower-income buyers. As a result, the behind-the-scenes discussions that are going on now among key Senate and House members won’t move to the fore for a few more years. In the meantime, however, the uncertainty about what will happen keeps would-be home buyers and lenders on the edge.
Proposals to curb mortgage interest write-offs add to market anxiety. Although a long shot, such plans will get serious attention by federal budget cutters, given the volume of red ink to be sopped up. Just talking about cutting the deduction will give potential home buyers another reason to delay plunging into the market.
The bottom line: Time alone will cure the nation’s ailing housing market. It’ll be years before most of America sees historically normal gains in home prices again — the result of enormous overhanging supplies combined with constrained demand. And that’s one big reason this economic recovery will take a meandering path.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Apple Readies for AI Upgrade with New iPhones
The Kiplinger Letter The tech giant has stumbled when it comes to artificial intelligence, but a new batch of iPhones will help it make headway.
-
Japan Enters a New Era of Risk and Reform
The Kiplinger Letter Japan has entered a pivotal moment in its economic history, undertaking ambitious policy and structural reforms to escape from decades of stagnation.
-
How Consumers Are Tinkering with Cutting-Edge AI
The Kiplinger Letter Companies launching artificial intelligence tools are jostling for consumer attention. Some products are already building a deep connection with users.
-
After Years of Stagnant Growth, Hope Emerges for EU Economy
The Kiplinger Letter Can a German fiscal push outweigh French political peril?
-
Small Businesses Are Racing to Use AI
The Kiplinger Letter Spurred on by competitive pressures, small businesses are racing to adopt AI. A recent snapshot shows the technology’s day-to-day uses.
-
How AI Puts Company Data at Risk
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
AI Start-ups Are Rolling in Cash
The Kiplinger Letter Investors are plowing record sums of money into artificial intelligence start-ups. Even as sales grow swiftly, losses are piling up for AI firms.
-
What is AI Worth to the Economy?
The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?