This weekâ€™s housing news was a primer on globalization. U.S. existing home sales fell 27 percent in July, twice as sharp a drop as Wall Street analysts said to expect. (Of course, theyâ€™re the same geniuses who didnâ€™t see their own meltdown coming; didnâ€™t expect the long, deep recession that followed; and couldnâ€™t figure out that the recovery would be slow and halting.) Right away, our stock markets sunk by one to two percent â€” no surprise there â€” but we werenâ€™t alone. On Wednesday morning, the financial news led with â€œEuropean Stocks Drop on Dismal U.S. Home Sales Dataâ€ and â€œMost (Asian) Stocks Fall Amid Speculation on U.S. Home Sales Report.â€
Why does a bad report on American home sales rattle investors a half-world away? To be sure, housing is an important piece of every U.S. recovery. And the world pays close attention to ours, since we remain by far both the worldâ€™s largest market for imports and the place where most foreign multinationals maintain their subsidiaries. This time, however, thereâ€™s more at stake. Housing is both a lynchpin for a full recovery from the financial crisis that pushed most of the world to the brink of depression; and the key to something better than our current stumbling expansion.
The link to finance is straightforward. Everybody remembers how Wall Streetâ€™s largest institutions swooned or crashed when the end of the housing bubble brought down hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that backed them up. But when Washington stepped in to rescue most of them, it took out its own risky bet that a housing recovery would quickly stop the bleeding. So we never seriously considered what Sweden did so successfully in the early 1990s â€” and what we did ourselves to resolve the S&L crisis: Take over an insolvent Bear Stearns, AIG or Merrill Lynch, pull out the weak and failed assets, and sell the still-healthy stuff to new investors who would promptly reopen the institution under a new name. And the bailouts didnâ€™t even require that these institutions put their books back in order by getting rid of the most risky housing-based assets which they still held.
The catch is that if the housing market continued to deteriorate â€” as it did â€” more of those assets would decline in value or fail outright. Those losses, current and prospective, leave finance much less willing to lend to most other companies. And that means that strong business investment, which is a critical part of all healthy expansions, this time will follow a housing recovery, not lead it.
Thereâ€™s more at stake in the current housing market than the pace of business investment. Some 70 percent of U.S. households are homeowners, which makes housing values the most important piece, by far, of most Americansâ€™ wealth and economic security. So, the sharp drop in those values has made most of Americans poorer than they had been; and, unsurprisingly, people who feel poorer tend to spend much less. The health of the housing market, in short, now directly affects both business investment and consumer spending, and with them the outlook for the entire U.S. recovery.
Itâ€™s little wonder that world markets reacted badly to this weekâ€™s dismal U.S. housing report. Beyond the 27 percent drop in existing home sales â€” and one day later, sales of new homes also fell sharply â€” nearly one-third of the houses that did sell were â€œdistressedâ€ properties. That means they were either in foreclosure or sold for less than their outstanding mortgages. Average home prices did inch up a little bit, but the only reason was that the end of the temporary tax credit for first-time homebuyers led to a particularly sharp fall in their purchases, which normally involve lower-priced homes.
Nor are there signs of a real housing recovery anytime soon. Foreclosures are still running at four times their normal levels â€” and nothing drives down a neighborhoodâ€™s housing prices and slows down sales more than nearby homes in foreclosure. On top of that, supply continues to way outpace demand: At current rates of home sales, it would take over a year to clear all of the homes already on the market today.
If we donâ€™t take serious steps to finally turn around these conditions, the United States and much of the rest of the world will be looking at a weak expansion, or worse, for several more years. One measure that could have a powerful effect would be steps to bring foreclosure rates down to normal levels. For example, congressional Democrats could advance a new program modeled on student loans for homeowners with mortgages in trouble. Homeowners who qualify could borrow the funds they need to stay in their homes, at a low interest rate, with no interest due the first year so long as they stay in the homes for at least two more years.
Most Republicans will denounce it as just another â€œbig government program.â€ Yet, without a housing recovery, the alternative is not only smaller government but also a smaller economy, because businesses canâ€™t find loans, people canâ€™t find jobs, and most consumers canâ€™t spend like they used to.