[Senate Hearing 112-24]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-24

 
                    THE STATE OF THE HOUSING MARKET

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

               EXAMINING THE STATE OF THE HOUSING MARKET

                               __________

                             MARCH 9, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                 Erin Barry, Professional Staff Member

                 Beth Cooper, Professional Staff Member

              Michael Piwowar, Republican Chief Economist

                    Jim Johnson, Republican Counsel

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MARCH 9, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Reed.................................................     4

                               WITNESSES

Susan M. Wachter, Richard B. Worley Professor of Financial 
  Management, Professor of Real Estate and Finance, The Wharton 
  School, University of Pennsylvania.............................     6
    Prepared statement...........................................    25
Mark A. Calabria, Director of Financial Regulation Studies, Cato 
  Institute......................................................     7
    Prepared statement...........................................    26
David Crowe, Chief Economist, National Association of Home 
  Builders.......................................................     9
    Prepared statement...........................................    31
Ron Phipps, President, National Association of 
  REALTORS'...........................................    10
    Prepared statement...........................................    36
Jeffrey Lubell, Executive Director, Center for Housing Policy....    12
    Prepared statement...........................................    38

                                 (iii)


                    THE STATE OF THE HOUSING MARKET

                              ----------                              


                        WEDNESDAY, MARCH 9, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 2:32 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good afternoon. Thank you, everyone, for 
being here. I call this hearing to order.
    The housing market is in an incredible period of 
transition. Families are reeling from the impact of a bubble 
that burst several years ago. In many regions, prices have yet 
to stabilize. Realtors are struggling to find the appropriate 
balance between adequate credit availability and improving 
underwriting standards. It is clear that the current housing 
market is fragile, and a strong recovery in housing is not yet 
underway. And as we begin debating the future of housing in 
America, it is important for the Committee to understand the 
challenges our Nation faces.
    Today's hearing is part of that process. We will explore 
various aspects of the housing market, including the impact of 
foreclosures on the single-family market, site built and 
manufactured housing, multifamily rental housing, and the 
availability of workforce housing.
    The housing sector remains in turmoil. Today we see 
decreasing property values eroding homeowners' equity, rapid 
foreclosures, devastating neighborhoods, and a fall in home 
ownership rate that threatens to place the option of home 
ownership out of the reach even for qualified borrowers.
    According to the Case-Shiller Housing Index, home values 
have fallen to their 2003 levels. That has put record numbers 
of homeowners underwater on their mortgages, effectively 
trapped in homes they cannot sell. Meanwhile, widespread 
foreclosures compound the problem by driving down the value of 
other homes in neighborhoods. Losing one's home to foreclosure 
often means the loss of the largest part of a family's wealth 
and can create further instability in communities. Last but not 
least, an unemployment rate that remains near 9 percent has 
contributed to home ownership falling to a level last seen in 
1998.
    The housing bubble peaks in 2006 and its aftermath left 
millions of American families underwater and struggling to 
cover their mortgage each month.
    I look forward to hearing from our witnesses regarding how 
changes in foreclosure trends, the housing supply, and falling 
home values are interacting to affect the housing market and 
economic recovery.
    Today's hearing will also explore the state of the housing 
market for middle- and lower-income households. The recession 
appears to have worsened the affordable housing crisis that 
already existed for so many Americans. A recent HUD study found 
that the number of very low income renters with worst-case 
housing needs increased by 20 percent from 2007 to 2009, the 
largest 2-year increase in the past 25 years.
    Finally, homelessness increased by 4 percent from 2008 to 
2009, and the number of people doubled up in temporary 
arrangements, unfortunately a common occurrence in many Native 
American communities, increased by 12 percent.
    In the last 3 years, we have seen that no segment of the 
population is immune to problems in the housing sector, and it 
is clear that addressing these problems is an urgent need for 
Americans of all economic backgrounds. We hope to examine these 
trends and the causes today.
    As my colleagues know, we have noticed a hearing for next 
week with Secretary Geithner and Secretary Donovan. This will 
begin the long-term discussion regarding housing finance 
reform, and I anticipate many future hearings on this topic. I 
ask my colleagues to reserve specific questions on that topic 
for next week.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you. Thank you, Mr. Chairman, for 
calling this hearing.
    I hope this, Mr. Chairman, will be the first of many 
hearings by the Committee on the housing market and the housing 
policy. The well-known problems in the housing market deserve 
the Committee's full attention.
    Over the past 3 years, national home prices have declined 
sharply from the unprecedented levels reached at the height of 
the housing bubble. Not since the Great Depression has our 
housing market experienced such a severe correction. Today we 
hope to learn the present state of the housing market and what 
the future may hold.
    How close is the market to bottoming out, for example? What 
will it take for home sales to reach normal levels? How does 
the housing market vary by region? And what factors account for 
the differences? What is the appropriate level of home 
ownership and why?
    In addition, it is my hope that today's hearing will set 
the stage for a discussion of the future of housing finance. 
Without question, our housing finance system is broken. The 
Federal Government now backs approximately 97 percent of all 
new mortgages. Our once thriving private markets have been 
largely replaced by Government programs. I believe this is a 
dangerous situation that will not only erode innovation and 
competition, but ultimately reduce the availability of housing 
and expose taxpayers to future bailouts.
    The Banking Committee should fully examine our housing 
markets with the goal of promptly adopting any needed reforms. 
I believe we will soon be upon the third anniversary of the 
American taxpayers' bailout of Fannie Mae and Freddie Mac. If 
ever history provides a clear lesson on the importance of 
Congress acting in a timely manner, it is this Committee's 
failure, I believe, to address the GSEs.
    The demise of Fannie and Freddie could have been prevented 
had the Committee acted sooner. Unfortunately, the GSEs were a 
very powerful political force right up until the time that they 
collapsed. Fannie and Freddie's disproportionate influence on 
this Committee and Congress ultimately cost the taxpayers 
billions and should be long remembered as a major, major policy 
mistake.
    Finally, Mr. Chairman, I would like to take a moment to 
discuss recent news reports about a proposal that has been 
described as a ``global mortgage servicing settlement.'' Based 
on the facts reported, I have serious concerns not only about 
the substance of the proposal, but also about the process. What 
is occurring appears to be nothing less than a regulatory 
shakedown by the new Bureau of Consumer Financial Protection, 
the FDIC, the Federal Reserve, certain Attorneys General, and 
the Administration, led by Elizabeth Warren.
    The proposed settlement appears to be an attempt to advance 
the Administration's political agenda rather than an effort to 
help homeowners who were harmed by servicers' actual conduct.
    Just last year, I warned that the new Bureau of Consumer 
Financial Protection would prove to be an unaccountable and 
unbridled bureaucracy. I did not expect to be proven correct so 
quickly. Under the guise of helping homeowners hurt by improper 
foreclosures, regulators are attempting to extract a staggering 
payment of nearly $30 billion for unspecified conduct. The $30 
billion would most likely fund a new slate of housing programs 
long sought by the Administration but previously rejected by 
the Congress.
    Setting aside for a moment the attempt to end-run Congress, 
I question whether removing $30 billion in capital through a 
back-door bank tax is the best way to jump-start lending in 
today's recession.
    The long-term consequences of this settlement could be even 
more serious. It would politicize our financial system. For 
example, the proposed settlement requires the appointment of 
third-party monitors, paid for by the banks. Mr. Chairman, I 
thought our financial regulators monitored our banks. Under 
this incredible proposal, however, those days would be over. 
Who might these third-party monitors be? ACORN or other 
community organizers, or perhaps other special interest allies 
of the Administration? I believe we need to know; the American 
people need to know.
    As troublesome as the substance of the settlement is, the 
process by which it is being imposed is potentially far more 
concerning. The proposed settlement would fundamentally alter 
the regulation of our banks, yet this would be done without 
congressional involvement by this Committee. Instead, it would 
be done by executive fiat through intimidation and threats of 
regulatory sanctions. The Administration and our financial 
regulators are clearly hoping the banks will consent to these 
new regulations.
    The precedent these strong-arm tactics could set, however, 
should be of concern to all citizens, especially Members of 
this Committee. If these tactics can be used successfully on 
financial institutions, they can be used on any business.
    I want to be very clear. If any person was harmed by the 
actions of these banks, I believe they should be compensated to 
the full limits of the law. As everyone knows, I did not vote 
to bail out the banks, and I strongly opposed TARP because I 
believe banks should be responsible for their actions. They 
should be held accountable here as well. However, efforts to 
help homeowners who were legitimately harmed by the banks 
should not be hijacked for the purpose of imposing a regulatory 
agenda the American people clearly rejected in the last 
election.
    Because of the longer-term consequences of the proposed 
settlement and the serious due process issues involved, I am 
requesting that this Committee begin an immediate inquiry into 
the facts and circumstances surrounding this effort. I am also 
requested that the Administration and our financial regulators 
refrain from entering into any settlement agreement until 
Congress, the Congress of the United States, has had an 
opportunity to conduct appropriate oversight on this matter. I 
think this is too important for Congress to sit on the 
sidelines.
    I hope you will heed this, Mr. Chairman.
    Chairman Johnson. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, Ranking Member Shelby, for inviting Ron Phipps of 
Rhode Island to join us today. Ron is the president of the 
National Association of REALTORS', and he along with 
his colleagues in Rhode Island are a mainstay not only of our 
economy, but all of our communities, so thanks, Ron, for being 
here, and gentlemen and ladies, thank you also for being here 
today.
    We all understand that a sustainable economic recovery has 
to depend on a healthy housing economy, and we have seen great 
turmoil in the housing market over the last 2 years. I have 
looked at the testimony of our witnesses. Each one of them 
notes the fact that the swollen inventory of housing, made 
worse by homeowners facing foreclosure, is dragging on the 
economy. So the issues that have been discussed by the Chairman 
and by Senator Shelby about how do we resolve these foreclosure 
issues, how do we get these houses back on the market, how do 
we put a floor into our housing markets to begin to grow again 
is central not just to the housing sector but to our overall 
economic development.
    We also understand that this foreclosure crisis has grown 
with great complexity because of the allegations of robo-
signing, illegal behavior of financial institutions, and poor 
supervision by regulators. We also understand, as alluded to by 
Senator Shelby, that the Attorneys General of each State have 
banded together and have taken the lead to protect their 
constituents and their neighbors and to provide them 
satisfaction. This effort was theirs, and it has been 
supplemented by the activities of the Federal regulators to try 
to develop a proposal that will deal with several intersecting 
and complicated situations:
    Were there illegalities with respect to foreclosure 
procedures? Simple issues about who holds title to homes, that 
is in doubt now, which upsets the ability to grow the economy 
once again. The status of bond holders in these mortgage-backed 
securities, do they have an ability to sue for billions of 
dollars for breaches of representations and warranties?
    Until we try to resolve this, frankly, in a comprehensive 
way, there is going to be a drag on the economy, a reluctance 
to move forward, not just simply because of homeowners and 
financial institutions, but also a whole array of financial 
actors.
    In that spirit, I propose--and I am sure there will be 
other proposals--S. 489, the Preserving Homes and Communities 
Act of 2011, to try to address some of these issues. I believe 
there should be a comprehensive solution. Legislatively, we 
should recognize that it will take probably--let me say it will 
not happen tomorrow because things do not happen around here 
tomorrow. And I think in substance and in fairness, there 
should be pursuit of some type of comprehensive solution, 
voluntary because that is the nature of the solution in which 
the financial institutions feel that it is in their interests 
as well as Federal regulators, State Attorneys General, bond 
holders, to come to conclusion and to do it rapidly.
    I think time is wasting. I think we should approach this 
with the view that every homeowner deserves to be treated 
fairly. Some may not be able to maintain their homes, but they 
deserve a fair evaluation of whether their home arrangement, 
their mortgage, could be modified and that they can get on with 
their lives either in their home or at least knowing that a 
fair effort was made to help them.
    With that, I thank you, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman. I am going to pass 
for now. I look forward to the testimony of the witnesses.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Mr. Chairman, I am going to defer. I know 
we are going to have a vote shortly. I would like to hear the 
testimony. And I was unaware that the Chair was going to permit 
opening statements, but I really want to hear the testimony. I 
have read some of it already. But since we are going to have 
votes, I will defer.
    Chairman Johnson. Does anyone have an opening statement to 
give?
    [No response.]
    Chairman Johnson. Well, then, two votes are scheduled for 3 
o'clock, and we should get going.
    I would like to introduce our first witness, Dr. Susan 
Wachter. Dr. Wachter is the Richard B. Worley Professor of 
Financial Management and Professor of Real Estate and Finance 
at the Wharton School. Dr. Wachter is the author of over 150 
publications and is frequently called upon to testify before 
the U.S. Congress on mortgage markets and the financial crisis.
    Our next witness is Dr. Mark Calabria, who, in addition to 
being the director of financial regulation studies at the Cato 
Institute, is also a former staffer for this very Committee. 
Dr. Calabria has also served as Deputy Assistant Secretary for 
Regulatory Affairs at the U.S. Department of Housing and Urban 
Development prior to his work on Capitol Hill. We welcome you 
back to the Committee.
    David Crowe, Ph.D., is chief economist and senior vice 
president at the National Association of Home Builders. Dr. 
Crowe is responsible for NAHB's forecast of housing and 
economic trends, research and analysis of the home building 
industry, and consumer preferences as well as macroeconomic 
analysis of Government policies that affect housing. Welcome, 
Dr. Crowe.
    Our next witness is Mr. Ronald Phipps. Mr. Phipps is the 
president of the National Association of REALTORS', 
representing 1.1 million members involved in all aspects of the 
residential and commercial real estate industries. Mr. Phipps 
has previously served in many senior leadership positions 
within NAR. Welcome to the Committee.
    Jeffrey Lubell has been executive director of the Center 
for Housing Policy since 2006 and is the recognized expert in 
housing and community development policy. He has previously 
served as Director of the Policy Development Division in HUD's 
Office of Policy Development and Research. Thank you for being 
here, Mr. Lubell.
    Dr. Wachter, will you proceed?

 STATEMENT OF SUSAN M. WACHTER, RICHARD B. WORLEY PROFESSOR OF 
FINANCIAL MANAGEMENT, PROFESSOR OF REAL ESTATE AND FINANCE, THE 
           WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA

    Ms. Wachter. Chairman Johnson, Ranking Member Shelby, and 
other distinguished Members of the Committee, thank you for the 
invitation to testify today. It is my honor to be here to 
discuss the current state of the Nation's owner-occupied 
housing markets.
    At this time, housing markets for single-family owned homes 
are fragile. The most recent data available from Radar Logic's 
Residential Price Index show that home prices continued their 
decline in January 2011, with prices down over 34 percent from 
peak values. For the fourth quarter of 2010, again, the most 
recent data available, the Census Bureau reports homeowner 
vacancy rates have increased, now at 2.7 percent, up from 2.5 
percent in the third quarter of 2010. This is nearly 50 percent 
higher than the historical average vacancy rate for single-
family homes. The consensus estimate is that home prices will 
continue to decline in the range of 5 percent to 10 percent in 
the coming months. This is due to unsold inventory plus 
remaining so-called ``shadow'' inventory.
    The expectation of continued price declines will in itself 
deter home buying. Thus, the most pressing issue in the housing 
market today is how and when the excess inventory of homes will 
be resolved.
    Although the supply overhang threatens to depress home 
prices further, national housing prices may not be far from 
reaching a bottom based on fundamentals. The national house 
price-to-rent ratio, as calculated by Case-Shiller, is near the 
level observed in 2002 and 2003, which, given the low interest 
rates then prevailing, was not, I believe, significantly 
inflated. At today's even lower interest rates, the current 
rent-price ratio, which is near that, is not inconsistent with 
a bottoming of housing prices nationally. Homes today are also 
affordable relative to income. According to the National 
Association of REALTORS'' Housing Affordability 
Index, a family earning the median income has 185 percent of 
the income needed to purchase a median-priced home. Of course, 
that leaves aside major issues of ability to qualify.
    But, nonetheless, in the short and intermediate run, the 
big threat facing the housing market is the uncertainty 
surrounding the supply overhang. Assuming household formation 
rates do return to their historic levels--and they are way 
beneath that as of now--the excess vacancy could be absorbed--
and I emphasize ``could be''--in 3 years so that it is possible 
that by 2014 markets could reach equilibrium, nationally. But 
in the short and intermediate run, a slowing of job growth, a 
rise in interest rates, or a decline in the availability of 
credit would delay this and could cause further price declines 
or even a spiral of price declines.
    With or without stabilization of prices, distressed 
properties will continue to account for a large proportion of 
total sales in the markets. Recovery will depend upon continued 
strengthening of job markets and increased consumer confidence. 
For the incipient recovery to take hold, the availability of 
financing is also crucial.
    Given the policy questions before this Committee, it may be 
useful in ending to comment briefly on the broader issue of 
housing finance. Borrowers who qualify for home loans are able 
to access historically low mortgage rates for 30-year, fixed-
rate loans, which is helping to shore up the market. Questions 
about whether such mortgages will be available or what will 
replace them are likely to be an additional and, going forward, 
increasingly important factor creating uncertainty in housing 
markets. The housing finance system in the future that is yet 
to be created will be less vulnerable to economic disruptions 
affecting the ability to refinance if borrowers continue to 
have access to the standard fixed-rate mortgages that are not 
subject to refinance risk.
    With that, I thank you and I am open for questions. I 
appreciate it.
    Chairman Johnson. Thank you, Dr. Wachter.
    Dr. Calabria.

STATEMENT OF MARK A. CALABRIA, DIRECTOR OF FINANCIAL REGULATION 
                    STUDIES, CATO INSTITUTE

    Mr. Calabria. Chairman Johnson, Ranking Member Shelby, and 
distinguished Members of the Committee, I want to thank you for 
the invitation, and it really is a pleasure to be back here at 
this side of the table for a change.
    I want to start with saying you are going to hear a lot of 
predictions about and a lot of discussions about where the 
housing market is at and where it is going, and I largely agree 
with those. I think there is a consensus about where the market 
is at. I think there is a consensus about the fragilities, and 
I think there is some consensus about direction of prices. I 
have touched on that in my testimony, so rather than repeat 
what everybody else will say, I think I will spend my time 
talking about my points of departure with other witnesses, and 
that is not to minimize the points of agreement.
    First, I think we need to keep in mind you cannot fight 
fundamentals. I think to a large degree we spent the last 4 
years trying to keep prices above what they should be in terms 
of market clearing levels. Ultimately prices will get to where 
they are going, and that is driven by households and it is 
driven by income more than anything else, and we are seeing it 
get there.
    I want to see if I can submit for the record an article 
that was in Bloomberg yesterday, and I think the title says it 
all: ``U.S. Home Sales Accelerate as Price Decline Rebound.'' 
And I think the point that I would like to make is housing 
markets work like every other market. If you want to clear 
excess inventory, prices have to come down, and that is the way 
we need to do it.
    A point I also want to make as well is while we have seen 
stabilization at the national level, there are tremendous 
differences across localities. While again we see median homes 
prices to median incomes around three, that is a historic 
trend, and that is, I think, a healthy trend, and that is where 
a healthy market is at. In San Francisco, that multiple is 
still eight. So there are a number of markets that are still 
relatively unaffordable, and the importance, I think, of this 
is that almost all the Federal policies we have, whether it is 
Federal Reserve interest rate policy, whether it is homebuyer 
tax credits, act through the demand side of the market. And the 
reason that this is important is that in markets with very 
rigid supply if you think back to your Econ. 101, essentially 
an inelastic supply curve, the demand forces prices up, and 
markets where you can bring supply on quite easily, you end up 
having excess supply. I think this is best illustrated--I talk 
about this in my testimony. Phoenix and San Diego are 
essentially the same size, yet San Diego over the last year has 
seen price increases, a bit minor, whereas Phoenix has seen an 
8-percent decline. Part of that is driven by, despite the 
similar population and migration trends, the number of building 
permits in Phoenix is over twice that in San Diego. So local 
conditions very much matter. We cannot lose sight of that. And 
I am concerned that what looks like a stabilization at the 
national level is really just an offsetting of what is going on 
in very different markets, and that is something to keep in 
mind.
    The other point I want to make in terms of the foreclosure 
crisis is we need to keep in mind negative equity alone is not 
the cause of most delinquencies. It is almost always coupled 
with a life event, like a job loss, or health care costs. Yes, 
there is some degree of strategic defaults which are those that 
just simply walk away because the house price has declined. I 
think those are under 25, 20 percent, and I do not think this 
should necessarily be the focus of policy. So I do think we 
need to be concerned about solutions that focus solely on 
negative equity.
    I think we need to be worried about impacts of our housing 
policies and our home ownership on labor markets. It is well 
appreciated that the higher your home ownership rate, usually 
the higher you have structural unemployment. So I think about a 
percentage point of the unemployment rate we are seeing today 
is a direct result of the high home ownership rate we had going 
into this crisis combined with the foreclosure assistance 
programs and the other things in the marketplace that delay 
this.
    I would also say in terms of a balancing of it, I think the 
risks are much greater if we keep prices above market clearing 
levels than they are if we allow prices to overshoot on the way 
down. And there are certainly risks if we allow them to 
overshoot on the way down. But I want to echo something that 
Dr. Wachter said, which is the expectation of further price 
declines can have a considerable impact on keeping homeowners 
on the sidelines. We are far better in terms of turning the 
market around if we get to the point where buyers believe 
prices can go no further down. In my opinion, we are not there 
yet.
    I want to close with saying I am greatly concerned, as I am 
sure Members of the Committee are, that the taxpayer stands 
behind almost all credit risk in the mortgage market. We are 
potentially looking at further bailouts. I think this is 
incredibly unhealthy. I think we recognize under all the 
Administration's three proposals, interest rates will go up. 
And they will, of course, go up because of inflation and 
Federal Reserve policy. We need to prepare for that now, and I 
think we need to move away from the sense of having the market 
not take this risk and pass it on to the taxpayers. As I note 
in my testimony, there is a tremendous amount of capacity 
outside of the GSEs in the rest of the financial services 
industry, and I am happy to go into further detail on that in 
Q&A.
    With that, I thank you again, and I look forward to the 
discussion.
    Chairman Johnson. Thank you, Dr. Calabria.
    Dr. Crowe.

STATEMENT OF DAVID CROWE, CHIEF ECONOMIST, NATIONAL ASSOCIATION 
                        OF HOME BUILDERS

    Mr. Crowe. Thank you, Mr. Chairman. My name is David Crowe. 
I am the chief economist for the National Association of Home 
Builders, a trade association of roughly 160,000 members who 
work in the residential construction industry. I appreciate the 
opportunity to testify today on the condition of the Nation's 
housing markets and the prospects for recovery in the housing 
sector.
    The state of the Nation's housing market is improving but 
fragile. While the bottom of the market is behind us, the road 
to a robust recovery for housing remains a long and difficult 
path. High unemployment, unavailable buyer and builder 
financing, and consumer uncertainty are challenges for the home 
building sector.
    A weakened housing sector will hold back economic growth. 
Traditionally, housing has led the U.S. economy out of 
recessions. In previous recoveries, housing grew at 28 percent 
in the first year of the recovery. In this recovery, housing 
has grown at less than 5 percent.
    Construction unemployment remains the highest of any major 
area of the economy, with more than 1.4 million jobs lost in 
residential construction and an equal amount lost in the 
building supply sector.
    National housing prices stabilized in early 2010, but have 
weakened due to the elevated share of distressed sales. 
However, in many areas the ratio of house prices to income has 
returned to historic levels, and on a national basis, the 
price-to-income ratio has returned to its historic average. I 
think Dr. Calabria mentioned the same.
    Currently housing production is running around 600,000 
units a year, well below the long-run trend of about 1.7 
million new homes, that are necessary to accommodate population 
growth and replacement of older housing stock.
    The gap between current production and trend housing 
construction is a result of multiple factors. First, the excess 
existing home inventory has held back prices and construction 
of new homes. Nevertheless, the inventory of existing homes has 
fallen from over a year's supply to about an 8-month supply. 
Inventories of new homes for sale are at a 42-year low, and the 
ready-to-occupy new homes stand at an all-time record low of 
78,000.
    Foreclosures remain a drag on prices and demand and are 
likely, not unlikely, to fade. However, foreclosures remain 
concentrated with very high rates in six States that hold 
almost half of the foreclosure inventory. One promising sign is 
the pent-up demand from delayed household formations. Young 
people in particular have not moved out of their parents' home 
or have remained as roommates. NAHB estimates that 
approximately 2 million household formations have been delayed. 
These households constitute a shadow demand that will be 
unlocked as the economy improves.
    Finally, and most importantly, in terms of the long-run 
health of the home building industry, lack of financing 
available to small builders is holding construction back where 
demand exists. Small businesses are at the heart of the 
residential construction sector who typically rely on debt 
financing. For such firms, the credit crunch persists and 
lending conditions are as tight as ever. As a result of these 
factors, near-term outlook for new construction remains cloudy.
    These sobering signals have persisted despite record high 
housing affordability and historically low mortgage interest 
rates. Yet tight buyer finance and challenges with appraisals 
means housing demand remains at low levels.
    NAHB forecasts that new home sales and housing production 
will remain weak in the first half of 2011, pick up slightly in 
the second half of the year, and build some momentum into 2012. 
Given this weak but improving market environment, NAHB urges 
Congress to approach housing policy issues with caution. For 
builders, these policy issues include providing a secondary 
mortgage market that ensures a reliable and uniform credit for 
homebuyers, preservation of the mortgage interest deduction and 
other housing tax rules, and unblocking the AD&C lending 
channels to permit home builders to contribute to the economy 
where and when demand exists. NAHB will soon present 
legislative proposals to ensure adequate credit availability to 
builders.
    Thank you for the opportunity to testify, and I look 
forward to your questions.
    Chairman Johnson. Thank you, Dr. Crowe.
    Mr. Phipps.

  STATEMENT OF RON PHIPPS, PRESIDENT, NATIONAL ASSOCIATION OF 
                      REALTORS'

    Mr. Phipps. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, thank you for inviting me to testify 
today regarding the current state of the Nation's housing 
market.
    My name is Ron Phipps. I am the 2011 president of the 
National Association of REALTORS', and I am proud to 
be part of a four-generation family owned residential real 
estate business based in Rhode Island. My passion is making the 
dream of home ownership available to American families. I am 
proud to testify today on behalf of the 1.1 million 
REALTORS' who share that passion, but also the 75 
million Americans who own homes and the 310 million Americans 
who require shelter.
    Most Americans understand the value of home ownership and 
aspire to it. They measure their personal financial wellness in 
large part in terms of home ownership and the equity they have 
within that home. Owning one's home is the first commandment of 
self-reliance for most families.
    So what is the state of housing? In a word, a word you have 
heard repeated, it is fragile. The housing climate continues to 
be erratic. Mortgage rates have jumped from the exceptionally 
low rates of last year and have risen slightly, and we expect 
them to go a little bit further.
    But the consumer malaise continues to prevail in the 
overall economy, effectively retarding the housing recovery. 
NAR believes that the economy may not be able to rely heavily 
on those consumers with stable jobs to help the overall 
economic recovery.
    Thanks to some job creation, existing home sales will 
likely see improvement in 2011. However, changes in the median 
home price will be determined by how fast the inventory is 
worked off. Assuming that the pace of home sales can hold at 
near 5.3 million units this year, then the industry absorption 
rate of inventory should keep home values broadly stable. This 
should help absorb some of the distressed shadow inventory that 
will be coming to the market.
    As we consider the future of Federal housing policies, we 
must keep in mind the immense value that sustainable home 
ownership provides to our country. Aside from the financial 
benefits gained over many years, home ownership improves 
communities, increases civic participation, and improves 
student test scores. These are benefits that make home 
ownership a pillar of society.
    What makes home ownership a pillar of our economy is its 
ability to create jobs. Our research suggests that 1 million 
additional home sales in 2011 can create 500,000 additional 
private sector jobs. So while housing alone may not pull us out 
of this stalled economy, hampering its recovery will severely 
negatively impact the overall economic recovery.
    REALTORS' believe that the pendulum on mortgage 
credit has swung too far in the wrong direction, and it is 
hurting consumers and the economy. The harmful products that 
led to the bubble and the crash are gone, and no one wants 
those to be brought back. But it is making it harder right now 
for those who can afford to obtain safe mortgages to further 
the recovery.
    Let us be clear. REALTORS' agree that reforms 
are required to prevent a recurrence of the housing market 
meltdown, but unnecessary raising of down payments and other 
mortgage costs will have stark ramifications for the overall 
economy. REALTORS' believe that Federal regulators 
should honor the congressional intent by crafting a qualified 
residential mortgage--that is, QRM--exemptions that include a 
variety of traditional safe, well-underwritten products for 30-
, 15-, 10-year fixed rates and 7-1 and 5-1 ARMs, those loans 
with flexible down payments, and they would require mortgage 
insurance. It is likely to shape housing policy for the future. 
It is very important.
    The QRM is also a precursor for the future of GSEs and is 
likely to be eligible for securitization. A poor QRM policy 
that does not heed the congressional intent will displace a 
large number of potential homebuyers, which in turn will slow 
economic growth.
    Further, increases in fees from both FHA and the GSEs and 
credit overlays will make it more difficult for people to 
finance. Ten to 15 percent of qualified purchasers are being 
precluded from obtaining mortgages. And, remember, every two 
additional closed transactions generates 500,000 additional 
sales and can actually produce 250,000 jobs.
    During World War II, President Franklin Delano Roosevelt 
said that a Nation of homeowners is unconquerable. In the 
1980s, President Ronald Reagan advocated the need to preserve 
the mortgage interest deduction in order to promote the most 
important aspect of the American dream--home ownership. 
America's realtors agree. We see a bright future for housing 
with America. We ask you, Congress, to maintain a positive, 
aggressive, forward-looking approach to overcome the obstacles 
we currently face and ensure that housing and the national 
economic recoveries are sustained.
    I thank you for the opportunity to speak today. As always, 
the National Association of REALTORS' is ready, 
willing, and able to work with Congress to create a bright 
future for our children and grandchildren.
    Thank you.
    Chairman Johnson. Thank you, Mr. Phipps.
    Votes have just been called. Because we have two votes, the 
Committee will recess for a short time and resume the hearing 
after the votes.
    [Recess.]
    Chairman Johnson. Mr. Lubell, will you please proceed?

  STATEMENT OF JEFFREY LUBELL, EXECUTIVE DIRECTOR, CENTER FOR 
                         HOUSING POLICY

    Mr. Lubell. Thank you, Chairman Johnson, Ranking Member 
Shelby, and distinguished Members of the Committee, for the 
opportunity to testify. My name is Jeff Lubell. I am the 
Director of the Center for Housing Policy, a research 
organization based in Washington, DC. We are the research 
affiliate of the National Housing Conference, a nonprofit 
policy organization dedicated to helping ensure safe, decent, 
and affordable housing for all Americans.
    I have been asked to focus on the state of the housing 
market faced by working and lower income Americans. I am going 
to try to do it with the aid of some illustrations here. The 
bottom line is that despite the housing market decline, in 
terms of home prices, housing affordability for low and 
moderate income families has actually worsened.
    So I know it is counterintuitive, but I will explain why 
basically lower home prices primarily benefit those Americans 
who have bought a home in recent years. If you have stayed 
where you are, or if you are a renter, things have actually 
gotten worse, and the reason is that incomes have gone down, 
home prices have only gone down slightly, about 1 percent for 
working families, whereas rents have gone up.
    So costs go up, incomes go down, the number of Americans 
with severe cost challenges increases. I have here a figure 
from HUD's Worst Case Needs Report, which Chairman Johnson 
cited in his testimony, his opening statement.
    As of 2009, 7.1 million renter households have worst case 
needs for housing. That means they spent more than half their 
income for housing, lived in severely substandard housing, and 
had very low income rents and did not receive rental 
assistance. That is an increase of 20 percent in just 2 years, 
and an increase of 42 percent since 2001.
    The primary factors are falling incomes, increased 
competition for affordable units, along with limited 
availability of rental assistance. But housing affordability 
challenges are not confined to renters and not confined to the 
very lowest income families. Next slide, please.
    We recently released a study looking at working households. 
These are households working at least 20 hours or more per week 
with incomes up to 120 percent of the area median income. This 
is a group of Americans, more than 40 million households. It is 
40 percent of the market.
    Nearly one in four paid more than half of their income for 
housing costs. One in four working families spent more than 
half of their income for housing costs in 2009. That is 10.5 
million households nationwide, an increase of 600,000 
households in just 1 year.
    As this table shows, there were increases in the share of 
working households with severe housing cost burdens throughout 
the country. Basically, costs went up by a statistically 
significant amount in 25 States. Those are the States that are 
shaded blue. They include Alabama, New Jersey, North Carolina, 
and Tennessee. There were----
    Senator Shelby. Say that again about my State and others.
    Mr. Lubell. Sure, sir. The share of working families who 
spent more than half of their income for housing went up by a 
statistically significant amount in those States, 25 States. 
They went down by a statistically significant amount in no 
States. So there were increases in other States, like in 
Hawaii, but because the numbers were not large enough, they 
were not statistically significant.
    Senator Shelby. And why did they do that?
    Mr. Lubell. Why did they go up?
    Senator Shelby. Lack of income, lack of opportunities?
    Mr. Lubell. So the reason that those numbers went up is 
that incomes went down, people had less opportunity for work, 
and rents went up. And owner costs went down only slightly, 
only 1 percent. So you have to distinguish. We talk about 
affordability in the market. That is for new housing. Very few 
people are moving. Most people are staying where they are. And 
for them, the problem has actually gotten worse.
    As shown in the next chart, the housing cost challenges 
affect a broad range of family types. They are split almost 
evenly between renters and owners. So basically, we have 
housing cost challenges among owners as well as among renters. 
They are most prevalent among families at the bottom of the 
income scale, but they are experienced by families across the 
spectrum, including families with incomes between 80 and 120 
percent of the median income. So we have problems across our 
income spectrum.
    My testimony includes some specific numbers about rural 
communities. We have very significant housing challenges in 
rural communities, and we had an increase of about 3 to 4 
percent in the number of homeless families between 2008 and 
2009.
    I do want to make a really quick point in my last 20 
seconds about the impact of rising energy prices. The cost of 
living in a place is affected not just by your shelter costs, 
but also by your utility costs and also by your transportation 
costs. As energy prices rise, affordability is going to get 
worse, and there is a huge connection between housing and 
transportation costs. They are related. Families think about 
them and treat them as a single budget item. If we want to 
address this, we are going to have to think about how to 
improve our coordination of housing and transportation policy 
to try to reduce the combined costs and improve overall 
affordability. I will look forward to your questions, and thank 
you for the additional time.
    Chairman Johnson. Thank you, Mr. Lubell.
    Dr. Wachter, can you discuss the structural barriers to the 
housing recovery that may exist in the financial system?
    Ms. Wachter. There is, right now, of course, a great deal 
of uncertainty about the future structure of the housing 
finance system. While that may not be weighing on housing 
prices at this moment, as we go forward, that is likely to be 
an increasingly important factor in the uncertainty of the 
future of housing prices.
    I would like to reiterate that housing is different from 
most commodities and goods in that it is an asset. This price 
is determined by households' expectations of the future. So, 
for example, future scarcity of housing finance would impact 
housing prices today.
    Chairman Johnson. Mr. Lubell, are there barriers to 
financing affordable rental housing in the current market? If 
so, how can these be overcome?
    Mr. Lubell. The short answer is yes, there are barriers to 
financing affordable housing, particularly affordable rental 
housing, but also, owner-occupied housing. To some extent, they 
are starting to resolve themselves. The market for equity, for 
example, in low-income housing tax credits has rebounded, but 
there continues to be difficulty on the debt side.
    One of the things that is really helping is the 
availability of credit through Fannie Mae and Freddie Mac. I 
know it is not popular these days to talk about the benefits of 
those entities, but one of the things that those entities are 
doing is helping to ensure the availability of credit for 
affordable rental housing, particularly at a long-term fixed 
rate of interest, which is extremely important for financing 
and affordable property.
    And those entities and their lending has actually, on the 
multifamily side, on the multifamily side has not incurred the 
same losses that we have seen on the single family side. So it 
is just important to understand that.
    I do think that one of the problems we have is that the 
number of families that need assistance, in terms of affordable 
housing, has gone up, as shown by these charts, and there is 
just not enough subsidy available to fill the gap between what 
the market can pay and the cost of actually building those 
homes. And so, that is something that I think is of continued 
interest as we think about how are we going to meet the growing 
challenge of affordable housing in America.
    Chairman Johnson. Dr. Crowe and Mr. Phipps, you discuss the 
idea that potential homeowners are not entering the market and 
are creating a shadow demand. Would you explain what factors 
would bring that demand out of the shadows to help absorb the 
excess housing supply? First, you, Dr. Crowe.
    Mr. Crowe. OK, thanks, Senator. Several things. One is 
jobs. Young people who have not yet moved out of their parents' 
home or have remained as roommates are unable to because either 
they do not have a sufficient income or they have no income. 
And so, return of consistent job growth will be the first 
thing.
    And the second thing is some clarity about where the 
housing market is going. I think Jeff is correct that we are 
going to continue to see rent increases because we are not 
building enough rental units to keep up with the demand, so 
rents are going to go up. That is going to retard the continued 
delay in household formations. And as house prices remain 
uncertain, that is going to retard those folks from moving into 
a home because they do not want to buy a home, as Susan 
mentioned, until they are sure of the long-term sustainability 
of that house price.
    Chairman Johnson. Mr. Phipps.
    Mr. Phipps. Senator, the interesting thing to me when we 
testified is that four of us used the word ``fragile'' to 
describe the market. I am struck by the part where we say 
handle with care. The problem is, is that media treats real 
estate as a single market across the country. It is all local. 
One of the things we need to get back to is what is really 
going on in the local market and understand that the financing 
sources are, in fact, national.
    But the challenge that we are faced with right now is a lot 
of people who should be able to obtain financing are not able 
to. When Fannie and Freddie now have credit scores that average 
60 up from 720, we have got 15 percent of the market that could 
help absorb that shadow inventory.
    There is a second piece of the shadow inventory--in some 
ways, we would like to get it out there and resolve it so we 
can go back to a normal, stable, dynamic market, but there is 
an opportunity for short sales in the market which just has not 
been realized in an effective way, that is clearly better for 
the investor and actually, in most instances, better for the 
family. The investor ends up losing 37 percent of principal on 
average versus 50 percent. But the process of getting a short 
sale approved in a timely, human fashion is just nonexistent.
    The final point I would make is that we need understanding 
of mortgages and finance universally. It needs to be something 
people understand, and I believe the consumer understands their 
house and understands what they are buying, but they still have 
great difficulty understanding what the 100 or 150 pages of 
documents they sign at closing, which, by the way, you need to 
sign these now or you will not get the house.
    That process of understanding and comprehending what 
happens is really important in order for us to get back to a 
normal, informed market. At the end of the day, we need to get 
through the overhang, we need to have that excess inventory 
resolved so the market does what markets do, and frankly, there 
will be price stabilization when we get beyond that.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman. Dr. Calabria, some 
housing interest groups have called for more regulations to 
govern the foreclosure process which would lengthen the time to 
complete foreclosures. Some have even called for a foreclosure 
moratorium. What would be the consequences, in your opinion, of 
these policies on the housing market and the economy.
    Mr. Calabria. In the aggregate, we would be delaying the 
adjustment of the housing market to reaching an equilibrium of 
getting the inventory out of there. So I am very concerned that 
while we need to deal with those who can be helped, the vast 
majority of those who cannot be helped, we need to move that 
quicker. It is also important to keep in mind that somewhere 
from 30 to 40 percent of the foreclosures are on vacant 
properties, so those properties do not do anybody any good 
sitting there in those neighborhoods vacant.
    So I would actually say what we need to have is more of a 
two-track approach where we focus on families that can be 
helped, but those who we know who are not going to be able to 
be helped and stay in the unit they are in, are the units 
vacant, that needs to be sped up and that process needs to be 
quicker.
    I also want to comment very quickly on a couple of things 
that the Chairman mentioned, which is, we need to keep in mind 
that we all want to get back to a normal market, but we need to 
remember 2005 and 2006 were not normal markets and we do not 
want to go back to that.
    Senator Shelby. They were housing bubbles, were they not?
    Mr. Calabria. They were housing bubbles and I believe 
Professor Wachter mentioned and I agree with this, that about 
2002-2003, that was more like a normal market except for the 
massive refinance boom in 2003.
    Senator Shelby. And the chances of us going back to that 
are pretty slim, I hope.
    Mr. Calabria. In the short term, yes, but this is a country 
where we have had a long history of housing bubbles, every 10 
to 15 years, so I hope that we have learned something this time 
around, but I am not convinced of it.
    Senator Shelby. Dr. Calabria, has the force of the 
prospective homeowner been lost in the discussion of what the 
Government can do in mitigating mortgage foreclosures?
    Mr. Calabria. I think that this is an important point. I 
certainly have friends who tried to buy short sales and homes 
that were in foreclosure and had those transactions fall 
through. This is an important thing to keep in mind, which is, 
any time we try to push up prices artificially, we are simply 
transferring wealth from potential buyers to sellers, and I 
certainly do not think that is a legitimate process.
    Senator Shelby. And we are interfering in the market, 
aren't we?
    Mr. Calabria. We are, we are. We have to have the market 
find a price. I would reiterate, to me, the fundamental way of 
getting that pent-up demand out there is to get prices to a 
point where buyers just do not believe they can go any further 
down.
    Right now I would have concern that potential buyers feel 
like if they buy something today, they will lose money on it, 
so there is a little bit of wait-and-see. We need to get past 
that point where the only direction for prices to go is up and 
we are not there yet.
    Senator Shelby. Dr. Crowe, in your testimony, you state 
that the National Association of Home Builders urges Congress 
to agree to definite solutions regarding the future of the 
Government-sponsored enterprises. Except in the need for a 
reasonable transition period and understanding the deliberative 
nature of Congress that we are a part of, would you agree that 
Congress needs to begin considering how to reform our housing 
finance system now?
    Mr. Crowe. Senator, the simple answer is yes, we do need a 
solution to this. However, we do need to understand the fragile 
nature of our housing market and have the transition. And I 
would also say that the NAHB also supports some ultimate 
backstop by the Federal Government in order to maintain a 30-
year, fixed rate mortgage in this country.
    Senator Shelby. I want to get into the HAMP program. The 
HAMP program was promoted by President Obama as a way to help 3 
to 4 million struggling homeowners. To date, the program has 
put only 522,000 people in permanent loan modifications. By 
contrast, nearly 800,000 people have dropped out of the 
program.
    This is significant, I think, and it is disturbing because 
as Special Inspector General Neil Barofsky of TARP recently 
pointed out in testimony before the House Financial Services 
Committee, and I quote, he says, ``Failed trial modification 
often leave borrowers with principal outstanding on their loans 
and less home equity, depleted savings, and worst credit 
scores.''
    Dr. Calabria, do you agree with Mr. Barofsky's analysis 
there?
    Mr. Calabria. I think Inspector General Barofsky is 100 
percent correct in this, and I think we do need to be concerned 
that many of the people who have been through these 
modification programs come out worse than they have gone in. I 
think it is also important to keep in mind that we simply have 
not, and the Administration or even the last Administration, 
either has not put forth a baseline--we do not have a 
discussion over who should we be helping, what is a reasonable 
number, what is a reasonable expectation.
    Senator Shelby. Is that a good use of taxpayers' money?
    Mr. Calabria. I question whether it has been used 
effectively.
    Senator Shelby. OK. Mr. Phipps, in your testimony you 
stated that frequent increases in fees from both FHA and the 
GSEs and credit overlays from lenders will unnecessarily 
increase the cost to home buyers and discourage these 
consumers, who can otherwise afford the mortgage, from 
participating in the housing market.
    In both cases, these were existing fees designed to protect 
the taxpayer. If these reasonable fee increases deter a 
consumer from buying a house, does this not indicate that the 
person is better off renting, perhaps, and do you support 
charging actuarially sound fees at FHA and the GSE to prevent 
further Government bailouts, in other words, the hit on the 
taxpayer?
    Mr. Phipps. Senator, the short answer is that we believe 
the FHA serves a specific purpose and it is to fill a void in 
the market that is a larger percentage than it has 
historically. There have been actually several increases 
recently on FHA. Each time the increases for the threshold 
becomes higher.
    There has to be a balance between cost and benefit, and we 
actually welcome that conversation and that analysis. But in 
the short answer, we think that the stepping up of cost needs 
to really reflect the demand that the market will support. And 
if you raise that first level of the ladder too high and people 
do not get on it, then we have further comprising of overall 
value.
    So it is woven. It is absolutely woven. We would like to 
get back to a normal market where people who can sustain the 
mortgages have access to mortgage money to enjoy the gift, the 
benefit of home ownership.
    Senator Shelby. Mr. Chairman, I have one last question, if 
you will indulge me.
    Dr. Calabria, in your testimony you state, and I will 
quote, ``Unemployment is the primary driver of mortgage 
delinquency.'' Previously this Committee heard testimony from 
Dr. Paul Willen of the Federal Reserve stating, and I will 
quote him, ``When home prices fall, some bars can no longer 
profitably sell and then the income disrupting life events 
really take a toll.''
    One of the life events Dr. Willen referenced that day was 
unemployment. Does this analysis mean that the best way--and 
there are other ways--but the best way to help homeowners is to 
spur economic growth?
    Mr. Calabria. I would absolutely agree with that. I think a 
significant amount of the problems in our housing and mortgage 
markets would go away if we brought unemployment down 
significantly.
    Senator Shelby. Do you disagree with that, Dr. Crowe?
    Mr. Crowe. No, Senator.
    Senator Shelby. What about you, Dr. Wachter?
    Ms. Wachter. Employment growth is a major driver and, in 
fact, we need it to strengthen in order to have a housing 
market recovery.
    Senator Shelby. OK. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. And thank you 
all for your testimony. I want to talk about liquidity in the 
marketplace. It seems to me, and I would like to get your 
perspectives on this, how do we get banks to commit to lending 
for real estate projects again? Particularly, you know, right 
now it seems to me that except for a very high asset class, for 
example, which attracts institutional investors in like the 
luxury high rental markets, certainly in our area in New 
Jersey, other than that, you have underwriting criteria on 
lenders where projects that are performing, borrowers that, in 
fact, have current debt service, fully current, and have not 
had a blip in that process, ultimately finding themselves, 
because they do not appraise today at the level of the loan 
closing totally stopping projects in the midst of a project, 
even though the loan is performing.
    So I look at that liquidity issue and I look at the flip 
side of the liquidity issue on the consumer side and see the 
changes in the underwriting criteria. We certainly understand 
legitimate changes to ensure that we do not have people buying 
homes they cannot afford.
    But by the same token, you know, if we have had a 25 
percent drop in real estate values, but you could get 10 
percent down, based upon your income, and that would be, you 
know, take whatever price level you want of a $400,000 home, 
which is $40,000. Now you have to put 25 to 30 percent down, so 
that is anywhere, you know, nearly $100,000. I do not know how 
many people have $100,000 to put down on a home.
    So I am wondering, from your perspective, how do we deal 
with this challenge of the liquidity crisis both for the actual 
movement forward in the market by those who develop it and on 
the consumers who seek to purchase it?
    Mr. Crowe. I would like to take the first stab at that, 
Senator. I appreciate the question. On the production side, on 
the builder's side, the builders are having that difficulty. We 
have been surveying builders for 6 or 7 years, through the boom 
and into the bust, and what we find is a greater and greater 
percentage of them are being turned down at financial 
institutions, and that is their source of loanable funds.
    Builders are small companies and they go to small banks to 
borrow the money to build the houses to sell to their 
customers, and they cannot get that money. We have gone to the 
regulators and we say, ``There is something strange here.'' We 
do not see any differentiation in banks' response between the 
markets that are in good shape and the markets that are not. We 
understand why the bank might say no in the market that is 
overgrown with excess inventory, but we do not understand why 
they are saying no in a market that is showing some signs of 
recovery and people want to buy a house.
    And we do not get satisfactory answers from the regulators. 
So, in fact, NAHB will be presenting legislation that we hope 
you will consider that speaks to some of these regulatory 
overreactions, things like making guidelines absolutes so that 
the regulator has guidelines and yet they have turned them into 
absolutes so there is no breaking those barriers.
    Or evaluating properties, developed properties at their 
distressed level instead of at their build-out level. There 
will be that build-out level eventually, but we cannot seem to 
convince examiners that that will correct itself as that market 
corrects.
    Requiring a payoff of a loan when it is current, but the 
sell rate has not been the same as it should have been, and 
therefore, the bank has suddenly decided that they want their 
money back even though the builder is making regular payments. 
They just do not have the same sales rate as they promised.
    And then finally, we would like to see the SBA loan system 
more friendly to home builders. It is not a useful program to 
home builders right now.
    Senator Menendez. Anyone else? Mr. Phipps?
    Mr. Calabria. If one starts with the observation that many 
banks tend to essentially be spread lenders, you know, we all 
recall the sort of borrow at three, lend at six, and be on the 
golf course at three. Well, that is no longer really the case, 
but there is a degree of truth to it. My point being is that if 
we also start with the observation that despite the financial 
crisis, insured depositories, their balance sheet has actually 
increased throughout this crisis, and insured deposits actually 
increased.
    What they have done, however, is greatly change what they 
are holding on their balance sheet, and part of this is their 
incentive. We have set up a situation where you could 
essentially borrow from the Federal Reserve at near zero, put 
it in treasuries, earn a very nice spread that is absolutely 
risk-free. Part of that, if you look at the decline in small 
business lending and commercial bank, it almost exactly equals 
the increase in bank lending in terms of Government debt. So we 
have swapped who we have lent to.
    What I think is important here is we need to change the 
incentive system of banks, and I think we do need to question 
as well, while the Federal Reserve has paying interest on 
reserves as a way to get us out of this crisis, it does not 
make sense in a situation where there is not a lot of liquidity 
actually getting out to the economy to pay interest on 
reserves. We are encouraging banks to hold excess reserves.
    It is important to keep in mind, commercial insured 
depositories have a trillion dollars in cash just sitting 
around. So there is not a lack of capacity. It is really, how 
do we change the incentive system so that they put those funds 
into risk-making, like construction, but also into small 
business and other things. And I really think we need to look 
at monetary policy as a component of this and what the Fed is 
doing.
    Mr. Phipps. Senator, the only thing I would add is on the 
consumer side, your FICO scores become the equivalent of your 
SAT score, and if the FICO score is below a certain threshold, 
the lender really does not look at you in a holistic approach. 
We need to get back to common sense, holistic lending where 
they take the amount down, the whole financial profile of the 
potential borrower, when analyzing whether to give them 
financing or not.
    You do not need 760 as a minimum credit score to be credit-
worthy and to be honorable in terms of repaying back the 
mortgage. The pendulum has swung so far that the rate of 
default over the 2009 instruments, mortgages that were issued, 
is about 1.2 percent, which is well-below the normal we would 
have seen in the early 2000 range. So getting it back to medium 
is important.
    We have been meeting with the lenders, meeting with Fannie, 
Freddie, FHA to say, Please bring it back to a centrist, 
common-sense, sustainable criteria. We are just not seeing that 
impact as quickly as we would like it because at 15 percent of 
the market, if we move from 5 to 5.75, that is a lot of 
transactions and a lot of jobs. But the problem still is very, 
very much present in the marketplace.
    Senator Menendez. Thank you, Mr. Chairman. I have questions 
for the record for Mr. Lubell, but my time is over on 
affordable housing, which I would love to see your answer on, 
and we look forward to seeing your legislation and working on 
trying to change this dynamic, because I do not think we are 
going to move the housing market until we get the regulators 
moving in a different direction. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and I want 
to continue on in the conversation about credit, and 
specifically, Mr. Crowe, in your testimony, you noted, ``Most 
importantly for the Nation's small home builders, Congress, 
regulators, and financial institutions must work to unblock 
acquisition development and construction lending channels.''
    I think you mentioned that you may, in the near future, 
have a legislative proposal. I just wondered if there were some 
points you would like to preview for us.
    Mr. Crowe. Thank you, Senator. I was given an opening by 
Senator Menendez, and so I took it. In summary, what we are 
looking for is the Congress to throw its weight around, if you 
will, because we have not had any success in convincing the 
regulators that there seems to be one systematic regulation 
concerning home builders throughout the country, even though, 
as I think you have heard in testimony today, the markets are 
dramatically different across the country.
    And so, we have recovering markets in Texas, for instance, 
and some other States, and not so recovering in other States; 
and yet, we see no differentiation in the ability for builders 
to borrow. So what we are looking for is a little more sanity 
to the regulatory oversight that would allow financial 
institutions, who tell us they are perfectly comfortable with 
lending to real estate in certain markets, but are being told 
no by the regulators.
    Senator Merkley. And so essentially, is it a cap on the 
percentage of the loan portfolio that can go to homes?
    Mr. Crowe. Thank you. Yes, it is several points, but one of 
them is a guideline of no more than 100 percent of capital 
going to real estate. It is a guideline, nevertheless being 
used as a hard and fast rule. So if an institution has that 
much loan on its balance books already, it can no longer add 
any even though there is another good one out there.
    Senator Merkley. An individual was actually telling me, as 
the owner of a commercial building, where he went to get a real 
estate loan for that building, and in the end, the bank did it 
as a nonreal estate loan, essentially foregoing the collateral, 
which was an insane decision from a common-sense point of view, 
but as a result of these type of caps that you are referring 
to.
    Mr. Phipps, I really appreciated your point about the 
intangible value of home ownership. It is certainly something 
that I feel strongly about. Do you want to mention some of what 
you consider to be the intangible benefits?
    Mr. Phipps. At the end of the day, we all need shelter, so 
we need a place to live, and when you look at the benefits, 
when people--we keep talking about skinning the game, Senator, 
and I get entertained by that, that skinning the game is a down 
payment. Skinning the game is my name on that deed saying I own 
that property, that I have an investment for my family.
    Now, we got away from the discipline of taking out a 30-
year mortgage and paying it off. But that is the concept that 
worked for my parents, it worked for my grandparents. We need 
to go back to that, but that is an asset that really has a lot 
to do with my sense of place, accomplishment, and self-worth, 
and benefit to society.
    We as realtors are committed to the concept of self-
reliance. We believe that home ownership is a prerequisite for 
that. When you look at the benefits for neighborhood, for 
community, for test results, et cetera, they are all plus. We 
watch it with great caution because this Government has made a 
historic commitment to home ownership.
    We think, in the highest purpose for over a hundred years, 
and the game has been played this way for a hundred years, so 
we are very anxious about any effort to reduce the number of 
baseball bases on the diamond or change the number of innings 
or change the number of outs, because we think home ownership, 
at the end of the day, is right for our children and 
grandchildren.
    Senator Merkley. Well, thank you very much, and I really 
echo that. I certainly saw in my work with Habitat for Humanity 
and then other work in home ownership that the fact that one 
has the ability to have the freedom of choosing to do what you 
want on that property. No longer is there a rule about what 
color you can paint the house, no longer is there a landlord to 
call when something is broken, you have to take the 
responsibility for that.
    A huge positive influence on the children. The stability. 
You mentioned test results. Study after study is showing 
children do far, far better with the stability when the family 
is in home ownership and more likely to graduate from high 
school, more likely to go to college, more likely to have 
higher incomes, more likely to have lower dependence on any 
future payments, which saves--is not just intangible. That is 
tangible. That is a real, real benefit.
    It bothers me to hear folks saying that we should not press 
for home ownership in our society, especially because what they 
are responding to is the impact of predatory mortgages. If a 
family was unsuccessful on a predatory exploding interest rate 
mortgage, that does not mean they would not have been 
successful if they had been offered a straight-forward prime 
fully amortizing mortgage.
    I wanted to, in that sense, one of our major programs for 
home ownership is the home mortgage interest deduction and it 
is a very valuable program over the long term to reduce the 
size of payments. One thing that I have been interested in is 
more help at the front end, and that is, for working families, 
often the home mortgage interest deduction provides only a 
modest amount of assistance, especially when interest rates are 
low.
    Just a crude example, a $200,000 house, 10 percent down 
would be $180,000 mortgage, 5 percent, that would be $9,000 a 
year in interest, and your first year, which is the highest 
interest, and $9,000 for a couple is less than the standard 
deduction. So that couple would not actually get any benefit 
from the home mortgage interest deduction unless they had 
additional itemizable expenses. And if they did, it would 
probably be a modest amount.
    And so, I have been floating the idea, not of a temporary 
down payment tax credit, or better yet, ability to use those 
funds at closing, but of a permanent. And I realize permanent 
may be too expensive and too hard for people to seize on, but 
really what I am saying is, we used a down payment credit as a 
short-term stimulus, but in terms of working families having 
matching assistance to get into a home to begin with, spending 
a little bit of money on the front end is highly valuable.
    We are spending around $100 billion a year on the home 
mortgage interest deduction. For somewhere around $5 billion a 
year, we could help a whole lot of families make that 
transition into home ownership, and in the short term, my sense 
has been that it would help absorb this excess inventory that 
several folks have mentioned. So I just thought I would invite 
you to share any thoughts about that.
    Mr. Phipps. Senator, we actually have studied the proposal 
and we are very intrigued by it. The experience of the tax 
credits before we thought were very effective in stabilizing 
the market. In Australia right now they have exactly that type 
of program and it is working extremely well.
    You prefaced the conversation with the mortgage interest 
deduction and we believe that life is choices, and we are very 
sensitive that that, for us, is the penultimate thing that we 
will defend. But we certainly support and encourage programs 
that provide for home ownership and opportunities for that.
    Senator Merkley. Thank you. And, Mr. Crowe, from the home 
builders' point of view, any thoughts about that?
    Mr. Crowe. I think a similar comment. Down payment is the 
single biggest retardant for a first-time home buyer to get 
into a home. So any assistance. In fact, we still favor a 
higher loan to values, lower down payment mortgages with the 
appropriate premiums paid for the risks. So if there is another 
way to subsidize that down payment through some tax credit, we 
would certainly be supportive of that, certainly with the 
caveat that we still believe to be that the mortgage interest 
deduction is very important to the broad base of households.
    Senator Merkley. Yes.
    Mr. Phipps. Senator, if I may, there is one other thing 
that is a little bit disturbing for me in the conversation 
about down payments. The assumption is that if someone puts 5 
percent down, that is all they are putting down. The closing 
costs typically run between 3 and 5 percent additional. So when 
we talk about the down payment, we really need to add the real 
cost that the homeowner has to bring to closing in order for 
that to happen. It is more than 5 percent or 10 percent or 20 
percent. It is that amount plus the related closing costs.
    Senator Merkley. Point very well taken. And, Mr. Chair, I 
am over my time so I will follow up with additional comments 
you all have. Thank you.
    Chairman Johnson. Thank you, Senator Merkley. The housing 
market has several challenges to overcome. We took the initial 
steps in Dodd-Frank by strengthening underwriting standards and 
risk retention, but we still have work to do. I will look 
forward to continuing the discussion about the future of 
housing in America in the coming weeks and months.
    I am hopeful that as we explore the path forward, we will 
find more areas of agreement than disagreement. It is essential 
that we get this right for a sustainable housing market for 
American families. Thanks again to my colleagues and our panel 
for being here today. This hearing is adjourned.
    [Whereupon, at 4:26 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]

                 PREPARED STATEMENT OF SUSAN M. WACHTER
Richard B. Worley Professor of Financial Management, Professor of Real 
   Estate and Finance, The Wharton School, University of Pennsylvania
                             March 9, 2011

    Chairman Johnson, Ranking Member Shelby, and other distinguished 
Members of the Committee, thank you for the invitation to testify at 
today's hearing. It is my honor to be here to discuss the current state 
of the Nation's owner-occupied housing markets.
    At this time, housing markets for single-family owned homes are 
fragile. The most recent data available from Radar Logic's Residential 
Price Index show that home prices continued to decline in January 2011, 
with prices down over 34 percent from peak values. According to the 
S&P/Case-Shiller Home Price Index, the U.S. National Home Price Index 
declined 3.9 percent during the fourth quarter 2010 and is down 4.1 
percent for the year. In the most recent data, for the fourth quarter 
of 2010, the Census Bureau reports homeowner vacancy rates at 2.7 
percent, up from 2.5 percent in the third quarter of 2010. This is 
nearly 50 percent higher than the historical average vacancy rate for 
single-family homes. Looking ahead, the size of the current inventory 
of unsold homes and the so-called `shadow' inventory will likely 
depress the price of homes further before prices stabilize. Industry 
estimates predict that housing prices will fall 5 percent to 10 percent 
more this year. The expectation of continued price declines will in 
itself deter home buying. Thus, the most pressing issue in the housing 
market today is how and when the excess inventory of homes will be 
cleared.
    Existing single-family home sales have increased in recent months. 
The National Association of REALTORS' reports an annualized 
rate of 5.36M in January, which is significantly higher than the 5.09M 
level of January 2009. Over a quarter of these homes sold in 2010 were 
distressed (including those in default, scheduled for foreclosure 
auction, and REO) according to RealtyTrac. Homes in process of 
foreclosure sell for a 28 percent discount in RealtyTrac's most recent 
data. Not only do distressed homes sell for less, but with many homes 
still potentially in the foreclosure pipeline, an estimated 4 million 
homes--approximately 2 million in the foreclosure process and 2 million 
in default--this potential additional supply suppresses expected home 
prices. Homes with mortgages that are currently underwater may add to 
this potential excess supply. According to CoreLogic's report of March 
8, 2011, 23.1 percent of all residential properties with a mortgage 
were in negative equity at the end of the fourth quarter of 2010, up 
from 22.5 percent in the third quarter, resulting in an aggregate level 
of negative equity of $751 billion.
    Although this supply overhang threatens to depress home prices 
further, national housing prices may not be far from reaching a bottom. 
The most important factors affecting the fundamentals of demand for 
owner-occupied housing are employment, income, interest rates, and the 
availability of financing. These factors impact demand for owner-
occupied homes through household formation and the desired rate of home 
ownership. Household formation in particular depends upon job growth 
and is critical for the growth in demand for housing whether rental or 
owner-occupied. The recovery of housing markets requires that 
underlying fundamentals continue to improve. This includes critically 
that jobs continue to grow and that interest rates remain stable or 
increase within limited bounds as the economy gains strength.
    Today the national housing price-to-rent ratio, as calculated by 
Case-Shiller, is near the level observed in 2002-2003, which, given the 
low interest rates then prevailing, was not, I believe, significantly 
inflated. At today's lower interest rates, the current rent/price ratio 
is not inconsistent with a bottoming of housing prices nationally. 
Homes today are affordable relative to income. According to the 
National Association of REALTORS'' Housing Affordability 
Index, a family at the median income has 185 percent of the income 
needed to purchase a median-priced home.
    Nonetheless, in the short run and intermediate run, the big threat 
facing the housing market is the uncertainty surrounding the supply 
overhang. The glut of foreclosed and delinquent homes currently sitting 
on the market could take years to work through. How long might it take 
to absorb the excess housing inventory? According to the Census Bureau, 
the total U.S. housing stock consisted of 130 million units in 2010. It 
is generally estimated that average population growth requires 
approximately 1.5 million housing units to be constructed annually. 
Combining this number with the number of units that need to be replaced 
due to deterioration, 0.4 million according to the Congressional Budget 
Office, results in demand for approximately 2 million units annually. 
Housing starts are at historic lows, approximately 500k units annually, 
thus far from the historic average demand, and the current overall 
vacancy rate is approximately 10 percent or 13 million units. To reduce 
overall vacancy to historic norms of approximately 7 percent requires 
the absorption of 3 percent (or 4 million) homes. Assuming household 
formation rates return to their historic levels, the excess vacancy 
could be absorbed in as little as 2 to 3 years so that by 2014, markets 
could reach equilibrium, on a national basis. However, the threat to 
this scenario is the supply of homes waiting on the sidelines. We run 
the risk of overshooting on the downside and falling beneath the price 
level justified by fundamentals--just as we far overshot equilibrium 
prices on the way up to the peak in 2006.
    Thus pending foreclosures and potential future foreclosures from 
the shadow supply weigh heavily on the housing market. This potential 
additional supply of unsold homes suppresses home prices today and adds 
to uncertainty in the future. Last year, over a quarter of homes sold 
were foreclosures and short sales. If prices increase, underwater 
homeowners will be made whole as the market restores their equity, thus 
over time reducing the number of homes sold in distressed sales. If the 
share of distressed sales rises, housing prices will fall further. A 
reentry into a vicious cycle of house price declines could push more 
homeowners underwater, precipitating more defaults, which will drive 
prices lower again. I am not predicting this, but it is a possible 
outcome.
    Distressed home sales and underwater mortgages are concentrated 
regionally. According to RealtyTrac, in January 2011, five States--
California, Arizona, Florida, Michigan, and Nevada--accounted for over 
half of the Nation's foreclosure filings. The differences in job growth 
and inventory across States add to the regional disparate housing 
outcomes.
    In addition to regional differences, national uncertainty remains. 
In the short and intermediate run, a slowing of job growth, a rise in 
interest rates, or a decline in the availability of credit would cause 
further price declines on a national scale. In any case, distressed 
properties will continue to account for a large proportion of total 
sales in the coming months, although defaults appear to be diminishing 
with the overall increased stability of markets. We may be at a turning 
point or may shortly be in the second half of 2011. But a recovery will 
depend upon continued strengthening of job markets and increased 
consumer confidence. For an incipient recovery to take hold, the 
availability of financing and, given the policy direction of moving 
away from Federal support of mortgage markets, the availability of 
private capital to finance mortgages is crucial. Uncertainty affecting 
the housing market includes the availability of financing, the terms 
under which loans will be made, as well as the path of disposition of 
mortgages that are currently in distress.
    Today approximately 90 percent of housing finance is federally 
supported. Borrowers who do qualify for home loans are able to access 
historically low mortgage rates for 30-year, fixed-rate loans. During 
the housing bubble, the market abandoned the 30-year, fixed-rate 
mortgage. Instead of long-term, fixed-rate, amortized mortgages, the 
bubble featured the wild growth of nonamortized, adjustable-rate 
mortgages with short, introductory teaser periods. They were designed 
to be refinanced upon the expiration of a short 2-3 year teaser period, 
as the promotional interest rate expired. The 30-year, fixed-rate 
mortgage has served American homeowners well; it was a source of 
tremendous stability for consumer finance and the national economy. 
Questions about whether such mortgages will be available or what will 
replace them are likely to be an additional and increasingly important 
factor creating uncertainty in housing markets. Private markets have 
now recognized the instability that can be a feature of housing 
finance, especially with volatile capital flows and potential interest 
rate rises with global capital market disruptions. Going forward, the 
housing finance system will be less vulnerable to economic disruptions 
affecting the ability to refinance if borrowers continue to have access 
to standardized fixed-rate mortgages.
                                 ______
                                 
                 PREPARED STATEMENT OF MARK A. CALABRIA
        Director of Financial Regulation Studies, Cato Institute
                             March 9, 2011

    Chairman Johnson, Ranking Member Shelby, and distinguished Members 
of the Committee, I thank you for the invitation to appear at today's 
important hearing. I am Mark Calabria, Director of Financial Regulation 
Studies at the Cato Institute, a nonprofit, nonpartisan public policy 
research institute located here in Washington, DC. Before I begin my 
testimony, I would like to make clear that my comments are solely my 
own and do not represent any official policy positions of the Cato 
Institute. In addition, outside of my interest as a citizen, homeowner, 
and taxpayer, I have no direct financial interest in the subject matter 
before the Committee today, nor do I represent any entities that do.

State of the Housing Market
    The U.S. housing market remains weak, with both homes sales and 
construction activity considerably below trend. Despite expected 
increases in mortgage rates, many forecasters are projecting increased 
housing activity in 2011. Although activity will likely be above 2010 
levels, 2011 is expected to fall below 2009 levels and is unlikely to 
reach levels seen during the boom for a number of years. As other 
witnesses are likely to provide their economic forecasts of housing 
activity, which are generally within the consensus estimates, I will 
not repeat that exercise here.
    As in any market, prices and quantities sold in the housing market 
are driven by the fundamentals of supply and demand. The housing market 
faces a significant oversupply of housing, which will continue to weigh 
on both prices and construction activity. The Federal Reserve Bank of 
New York estimates that oversupply to be approximately 3 million units. 
Given that annual single family starts averaged about 1.3 million over 
the last decade, it should be clear that despite the historically low 
current level of housing starts, we still face a glut of housing. NAHB 
estimates that about 2 million of this glut is the result of ``pent-
up'' demand, leaving at least a million units in excess of potential 
demand. \1\
---------------------------------------------------------------------------
     \1\ Denk, Dietz, and Crowe, ``Pent-up Housing Demand: The 
Household Formations That Didn't Happen--Yet'', National Association of 
Home Builders. February 2011.
---------------------------------------------------------------------------
    The Nation's oversupply of housing is usefully documented in the 
Census Bureau's Housing Vacancy Survey. The boom and bust of our 
housing market has increased the number of vacant housing units from 
15.6 million in 2005 to a current level of 18.7 million. The rental 
vacancy rate for the 4th quarter of 2010 declined considerably to 9.4 
percent, although this remains considerably above the historic average. 
The homeowner vacancy rate actually increased from the 2nd and 3rd 
quarters to the 4th quarter of 2010, reached 2.7 percent, a number 
almost twice the historic average.
    The number of vacant for sale or rent units has increased, on net, 
by around 1 million units from 2005 to 2010. Of equal concern is that 
the number of vacant units ``held off the market'' has increased by 
about 1.5 million since 2005. In all likelihood, many of these units 
will reenter the market once prices stabilize.
    The fourth quarter 2010 national home ownership rate fell to 66.6 
percent, just above the 1998 figure of 66.5, eliminating almost all the 
gain in the home ownership rate over the last 12 years. Declines in the 
home ownership rate were the most dramatic for the youngest homeowners, 
while home ownership rates for those 55 and over were stable or saw 
only minor declines. This should not be surprising given that the 
largest increase in home ownership rates was among the younger 
households and that such households have less attachment to the labor 
market than older households. Interestingly enough, the percentage 
point decline in home ownership was higher among households with 
incomes above the median than for households with incomes below the 
median.
    Homeowner vacancy rates differ dramatically by type of structure, 
although all structure types exhibit rates considerably above historic 
trend levels. Single-family detached homes displayed an owner vacancy 
rate of 2.3 percent, while owner units in buildings with 10 or more 
units (generally condos or co-ops) displayed an owner vacancy rate of 
10.7 percent in the 4th quarter of 2010. Although single-family 
detached constitute 95 percent of owner vacancies, condos and co-ops 
have been impacted disproportionately.
    Owner vacancy rates tend to decrease as the price of the home 
increases. For homes valued under $150,000 the owner vacancy rate is 
3.1 percent, whereas homes valued over $200,000 display vacancy rates 
of about 1.5 percent. The vast majority, almost 75 percent, of vacant 
owner-occupied homes are valued at $300,000 or less. Owner vacancy 
rates are also the highest for the newest homes, with new construction 
displaying vacancy rates twice the level observed on older homes.
    While house prices have fallen considerably since the market's peak 
in 2006--over 23 percent if one excludes distressed sales, and about 31 
percent including all sales--housing in many parts of the country 
remains expensive, relative to income. At the risk of 
oversimplification, in the long run, the size of the housing stock is 
driven primarily by demographics (number of households, family size, 
etc.), while house prices are driven primarily by incomes. Due to both 
consumer preferences and underwriting standards, house prices have 
tended to fluctuate at a level where median prices are approximately 
three times median household incomes. Existing home prices, at the 
national level, are close to this multiple. In several metro areas, 
however, prices remain quite high relative to income. For instance, in 
San Francisco, existing home prices are almost eight times median metro 
incomes. Despite sizeable decline, prices in coastal California are 
still out of reach for many families. Prices in Florida cities are 
generally above four times income, indicating they remain above long-
run fundamentals. In some bubble areas, such as Phoenix and Las Vegas, 
prices are below 3, indicating that prices are close to fundamentals. 
Part of these geographic differences is driven by the uneven impact of 
Federal policies.
    Household incomes place a general ceiling on long-run housing 
prices. Production costs set a floor on the price of new homes. As 
Professors Edward Glaeser and Joseph Gyourko have demonstrated, \2\ 
housing prices have closely tracked production costs, including a 
reasonable return for the builder, over time. In fact the trend has 
generally been for prices to about equal production costs. In older 
cities, with declining populations, productions costs are often in 
excess of replacement costs. After 2002, this relationship broken down, 
as prices soared in relation to costs, which also included the cost of 
land. \3\ As prices, in many areas, remain considerably above 
production costs, there is little reason to believe that new home 
prices will not decline further.
---------------------------------------------------------------------------
     \2\ Edward Glaeser and Joseph Gyourko, ``The Case Against Housing 
Price Supports'', Economists' Voice October 2008.
     \3\ Also see, Robert Shiller, ``Unlearned Lessons From the Housing 
Bubble'', Economists' Voice July 2009.
---------------------------------------------------------------------------
    It is worth noting that existing home sales in 2010 were only 5 
percent below their 2007 levels, while new home sales are almost 60 
percent below their 2007 level. To a large degree, new and existing 
homes are substitutes and compete against each other in the market. 
Perhaps the primary reason that existing sales have recovered faster 
than new, is that price declines in the existing market have been 
larger. Again excluding distressed sales, existing home prices have 
declined 23 percent, whereas new home prices have only declined only 
about 10 percent. I believe this is pretty clear evidence that the 
housing market works just like other markets: the way to clear excess 
supply is to reduce prices.

Mortgage Markets and Mortgage Policies
    For those who can get a mortgage, rates remain near historic lows. 
These lows rates, however, are not completely the outcome of the 
market, but are driven, to a large degree, by Federal policy 
interventions. Foremost among these interventions is the Federal 
Reserve's current monetary policy. Of equal importance is the transfer 
of almost all credit risk from market participants to the Federal 
taxpayer, via FHA and the GSEs. Given massive Federal deficits as far 
as the eye can see, and the already significant cost of rescuing Fannie 
Mae and Freddie Mac, policymakers should be gravely concerned about the 
risks posed by the current situation in our mortgage markets. Immediate 
efforts should be made to reduce the exposure of the taxpayer.
    In transitioning from a Government-dominated to market-driven 
mortgage system, we face the choice of either a gradual transition or a 
sudden ``big bang.'' While I am comfortable with believing that the 
remainder of the financial services industry could quickly assume the 
functions of Fannie Mae and Freddie Mac, I recognize this is a minority 
viewpoint. Practical politics and concern as to the state of the 
housing market point toward a gradual transition. The question is then, 
what form should this transition take? One element of this transition 
should be a gradual, step-wise reduction in the maximum loan limits for 
the GSEs (and FHA).
    If one assumes that higher income households are better able to 
bear increases in their mortgage costs, and that income and mortgage 
levels are positively correlated, then reducing the size of the GSEs' 
footprint via loan limit reductions would allow those households best 
able to bear this increase to do so. As tax burden and income are also 
positively correlated, the reduction in potential tax liability from a 
reduction in loan limits should accrue to the very households benefited 
most by such a reduction.
    Moving beyond issues of ``fairness''--in terms of who should be 
most impacted by a transition away from the GSEs--is the issue of 
capacity. According to the most recent HMDA data (2009), the size of 
the current jumbo market (above $729k) is approximately $90 billion. 
Reducing the loan limit to $500,000 would increase the size of the 
jumbo market to around $180 billion. Since insured depositories have 
excess reserves of over $1 trillion, and an aggregate equity to asset 
ratio of over 11 percent, it would seem that insured depositories would 
have no trouble absorbing a major increase in the jumbo market.
    Given that the Mortgage Banker Association projects total 
residential mortgage originations in 2011 to be just under $1 trillion, 
it would appear that insured depositories could support all new 
mortgages expected to be made in 2011 with just their current excess 
cash holdings. While such an expansion of lending would require capital 
of around $40 billion, if one is to believe the FDIC, then insured 
depositories already hold sufficient excess capital to meet all new 
mortgage lending in 2011.
    Moving more of the mortgage sector to banks and thrifts would also 
insure that there is at least some capital behind our mortgage market. 
With Fannie, Freddie, and FHA bearing most of the credit risk in our 
mortgage market, there is almost no capital standing between these 
entities and the taxpayer.
    The bottom line is that reducing the conforming loan limit to no 
more than $500,000, if not going immediately back to $417,000, would 
represent a fair, equitable and feasible method for transitioning to a 
more private-sector driven mortgage system. Going forward, the loan 
limit should be set to fall by $50,000 each year. As this change could 
be easily reversed, it also represents a relatively safe choice.
    Reducing the competitive advantage of Fannie Mae and Freddie Mac 
via a mandated increase in their guarantee fees would both help to 
raise revenues while also helping to ``level the playing field'' in the 
mortgage market. Given that the Federal taxpayer is covering their 
losses and backing their debt, along with the suspension of their 
capital requirements, no private entity can compete with Fannie Mae and 
Freddie Mac. We will never be able to move to a more private market 
approach without reducing, if not outright removing, these taxpayer-
funded advantages.
    An increase in the GSE guarantee fee could also be used to recoup 
some of the taxpayer ``investment'' in Fannie Mae and Freddie Mac. 
Section 134 of the Emergency Economic Stabilization Act of 2008, better 
known as the TARP, directed the President to submit a plan to Congress 
for recoupment for any shortfalls experienced under the TARP. 
Unfortunately the Housing and Economic Recovery Act of 2008, which 
provided for Federal assistance to the GSEs, lacked a similar 
requirement. Now is the time to rectify that oversight. Rather than 
waiting for a Presidential recommendation, Congress should establish a 
recoupment fee on all mortgages purchased by Fannie Mae and Freddie 
Mac. Such a fee would be used directly to reduce the deficit and be 
structured to recoup as much of the losses as possible. I would 
recommend that the recoupment period be no longer than 15 years and 
should begin immediately. A reasonable starting point would be 1 
percentage point per unpaid principal balance of loans purchased. Such 
as sum should raise at least $5 billion annually and should be 
considered as only a floor for the recoupment fee.
    In any discussion regarding costs in our mortgage market, we must 
never forget that homeowners and homebuyers are also taxpayers. Using 
either current taxes or future taxes (via deficits) to fund subsidies 
in the housing market reduces household disposable income, which also 
reduces the demand for housing. None of the subsidies provided to the 
housing and mortgage markets are free. They come at great costs, which 
should be included in any evaluation of said subsidies.

Contribution of Federal Policy
    Federal Government interventions to increase house prices, 
including Federal Reserve monetary and asset purchases, have almost 
exclusively relied upon increasing the demand for housing. The problem 
with these interventions is they have almost the opposite impact 
between markets where supply remains tight and those markets with a 
housing glut. In areas where housing supply is inelastic, that is 
relatively unresponsive (often the result of land use policies), these 
programs have indeed slowed price declines. Areas where supply is 
elastic, where building is relatively easy, have instead seen an 
increase in supply, rather than price. For these areas the increase in 
housing supply will ultimately depress prices even further.
    A comparison of San Diego, CA, and Phoenix, AZ, illustrates the 
point. Both are of similar population (2.5 million for Sand Diego, 2.2 
million for Phoenix), and both witnessed large price increases during 
the bubble. Yet the same Federal policies have drawn different supply 
and price responses. In 2010, about 8,200 building permits were issued 
for the greater Phoenix area; whereas only about 3,500 were issued for 
San Diego. Existing home prices (2010) in Phoenix fell over 8 percent, 
whereas prices in San Diego actually grew by 0.6 percent. This trend is 
compounded by the fact that prices are almost three times higher in San 
Diego than in Phoenix. The point is that Federal efforts to ``revive'' 
the housing market are sustaining prices in the most expensive markets, 
while depressing prices in the cheapest markets, the opposite of what 
one would prefer. As home prices are correlated positively with 
incomes, these policies represent a massive regressive transfer of 
wealth from poorer families to richer.
    Among policy interventions, the Federal Reserve's interest rates 
policies are perhaps having the worst impact. It is well accepted in 
the urban economics and real estate literature that house prices 
decline as distances from the urban core increase. It is also well 
accepted that the relative price of urban versus suburban house prices 
is influenced by transportation costs. For instance, an increase in the 
price of gas, will, all else equal, lower the price of suburban homes 
relative to urban. If loose monetary policy adds to increases in fuel 
prices, which I believe it currently is, then such monetary policies 
would result in a decline in suburban home prices relative to urban. 
One can see this dynamic play out in California. In general, prices in 
central cities and urban cores, have witnessed only minor declines or 
actual increases over the last year. According to the California 
Association of Realtors, overall State prices are down just 2 percent 
from January 2010 to January 2001. Yet prices in the inland commuting 
counties--Mariposa (-27%), San Benito (-14%), Butte (-29%), Kings (-
16%), Tulare (-16%)--are witnessing the largest declines, in part 
driven by increases in commuting (gas) costs.

Foreclosure Mitigation and the Labor Market
    There is perhaps no more important economic indicator than 
unemployment. The adverse impacts of long-term unemployment are well 
known, and need not be repeated here. Although there is considerable, 
if not complete, agreement among economists as to the adverse 
consequences of jobless; there is far less agreement as to the causes 
of the currently high level of unemployment. To simplify, the differing 
explanations, and resulting policy prescriptions, regarding the current 
level of unemployment fall into two categories: (1) unemployment as a 
result of lack of aggregate demand, and (2) unemployment as the result 
of structural factors, such as skills mismatch or perverse incentives 
facing the unemployed. As will be discussed below, I believe the 
current foreclosures mitigation programs have contributed to the 
elevated unemployment rate by reducing labor mobility. The current 
foreclosures mitigation programs have also helped keep housing prices 
above market-clearing levels, delaying a full correction in the housing 
market.
    First we must recognize something unusual is taking place in our 
labor market. If the cause of unemployment was solely driven by a lack 
of demand, then the unemployment rate would be considerably lower. Both 
GDP and consumption, as measured by personal expenditures, have 
returned to and now exceed their precrisis levels. But employment has 
not. Quite simply, the ``collapse'' in demand is behind us and has been 
so for quite some time. What has occurred is that the historical 
relationship between GDP and employment (which economists call ``Okun's 
Law'') has broken down, questioning the ability of further increases in 
spending to reduce the unemployment rate. Also indicative of structural 
changes in the labor market is the breakdown in the ``Beveridge 
curve''--that is the relationship between unemployment and job 
vacancies. Contrary to popular perception, job postings have been 
steadily increasing over the last year, but with little impact on the 
unemployment rate.
    Historically many job openings have been filled by workers moving 
from areas of the country with little job creation to areas with 
greater job creation. American history has often seen large migrations 
during times of economic distress. And while these moves have been 
painful and difficult for the families involved, these same moves have 
been essential for helping the economy recover. One of the more 
interesting facets of the recent recession has been a decline in 
mobility, particular among homeowners, rather than an increase. Between 
2008 and 2009, the most recent Census data available, 12.5 percent of 
households moved, with only 1.6 moving across State lines. 
Corresponding figures for homeowners is 5.2 percent and 0.8 percent 
moving across State lines. This is considerably below interstate 
mobility trends witnessed during the housing boom. For instance from 
2004 to 2005, 1.5 percent of homeowners moved across State lines, 
almost double the current percentage. Interestingly enough the overall 
mobility of renters has barely changed from the peak of the housing 
bubble to today. This trend is a reversal from that witnessed after the 
previous housing boom of the late 1980s burst. From the peak of the 
bubble in 1989 to the bottom of the market in 1994, the percentage of 
homeowners moving across State lines actually increased.
    The preceding is not meant to suggest that all of the declines in 
labor mobility, or increase in unemployment, is due to the foreclosure 
mitigation programs. Far from it. Given the many factors at work, 
including the unsustainable rate of home ownership, going into the 
crisis, it is difficult, if not impossible, to estimate the exact 
contribution of the varying factors. We should, however, reject 
policies that encourage homeowners to remain in stagnant or declining 
labor markets. This is particularly important given the fact that 
unemployment is the primary driver of mortgage delinquency.

Conclusion
    The U.S. housing market is weak and is expected to remain so for 
some time. Given the importance of housing in our economy, the pressure 
for policymakers to act has been understandable. Policy should, 
however, be based upon fostering an unwinding of previous unbalances in 
our housing markets, not sustaining said unbalances. We cannot go back 
to 2006, and nor should we desire to. As the size and composition of 
the housing stock are ultimately determined by demographics, something 
which policymakers have little influence over in the short run, the 
housing stock must be allowed to align itself with those underlying 
fundamentals. Prices should also be allowed to move towards their long-
run relationship with household incomes. Getting families into homes 
they could not afford was a major contributor to the housing bubble. We 
should not seek to repeat that error. We must also recognize that 
prolonging the correction of the housing market makes the ultimate 
adjustment worse, not better. Lastly it should be remembered that one 
effect of boosting prices above their market-clearing levels is the 
transfer of wealth from potential buyers (renters) to existing owners. 
As existing owners are, on average, wealthier than renters, this 
redistribution is clearly regressive.
                                 ______
                                 
                   PREPARED STATEMENT OF DAVID CROWE
         Chief Economist, National Association of Home Builders
                             March 9, 2011

    The National Association of Home Builders (NAHB) appreciates the 
opportunity to submit this statement to the Senate Committee on 
Banking, Housing, and Urban Affairs on the current state of the 
Nation's housing markets, prospects for the future, and housing policy 
implications. NAHB represents over 160,000 member firms involved in 
home building, remodeling, multifamily construction, property 
management, housing finance, building product manufacturing and other 
aspects of residential and light commercial construction.
    The state of the Nation's housing markets is improving but fragile. 
While the bottom of the market in terms of housing production and 
significant price declines is behind us, the road to a robust recovery 
for housing remains a long and difficult path. High unemployment, 
housing policy uncertainty in terms of buyer and builder finance, and 
long-term fiscal issues are challenges for the housing construction 
sector as it struggles to return to its long-run trend, with the job 
and economic benefits that such a development would bring. NAHB 
estimates that the construction of each single-family home creates 
three jobs, $90,000 in Federal, State, and local tax revenue, $145,000 
in wage income, and $86,000 in net business income.
    NAHB urges Congress to agree to definite solutions regarding the 
future of the Government-sponsored enterprises (GSEs) Fannie Mae and 
Freddie Mac that ensure a functioning housing finance system that 
provides credit to homebuyers on reasonable terms, protect the housing 
tax incentives, including the deduction for home mortgage interest, and 
unblock the obstacles to acquisition, development, and construction 
(AD&C) lending for builders.
    In normal times, housing's total contribution to Gross Domestic 
Product (GDP) is approximately 18 percent. Today it stands at a 
diminished 15 percent, with home building's direct component down from 
a normal of 5 percent of GDP to 2.4 percent of GDP. In the first year 
of all post-World War II economic recoveries, except for the most 
recent cycle, housing averaged a 28 percent increase in production. In 
this recovery, housing construction has grown less than 5 percent. As a 
result, unemployment in the construction sector remains the highest of 
any major area of the economy.

General Economic Conditions
    A recovery in the housing market is dependent on strong economic 
performance by the economy as a whole. The Commerce Department's second 
estimate of growth in real GDP for the final quarter of last year, 
released on February 25, showed a downward revision from 3.2 percent to 
2.8 percent; a revision that dropped growth for 2010 as a whole from 
2.9 percent to 2.8 percent. This surprising development primarily 
reflected downward revisions to spending by consumers and State and 
local governments, along with a reduction in net exports.
    Last week's job market data suggested an improving labor market. 
Total nonfarm payroll employment increased by 192,000 in February, a 
marked improvement after the weak performance in January. Job gains 
occurred broadly across sectors of the economy. Year-over-year, total 
payroll employment has grown by 1.3 million, or an average of 106,000 
per month. The unemployment rate decreased to 8.9 percent, but the 
number of unemployed is still high at 13.7 million.
    Residential construction employment increased slightly in February, 
up 0.66 percent (13,200 jobs) to 2.024 million. Conditions are 
improving in the sector, as this is the fourth consecutive month of 
growth. However, year-over-year, the sector is still down 65,800 jobs 
(-3.15%). Total construction unemployment continued to improve, falling 
to 16.39 percent on a seasonally adjusted basis, from 18.65 percent in 
January. Nonetheless, total loss in residential construction employment 
since its peak in April 2006 is 1.426 million (-41.3%).
    While it is positive that overall job creation is occurring, the 
economy in general, and the housing markets in particular with respect 
to the demand side of the market, require much more robust employment 
growth. In the 1990s, the labor force grew at a rate 139,000 a month, 
and in the prerecession 2000s this rate was 122,000. To accommodate 
population growth and replace the more than 8 million jobs lost in the 
Great Recession, the economy needs to generate at least 300,000 jobs a 
month.
    With respect to regional economic conditions, unemployment rates 
are declining and jobs are being created, but there remains significant 
variation across States. Nevada's total job losses exceed 14 percent of 
its employment force, and Michigan, Florida, and Arizona have recorded 
job losses of more than 10 percent of their labor forces. Nevada has 
the top unemployment rate, as of December 2010, at 14.5 percent, with 
the States of California, Florida, Michigan, Rhode Island, South 
Carolina, Oregon, Kentucky, Georgia, and Mississippi possessing rates 
greater than 10 percent. Nonetheless, all States have posted reductions 
in unemployment rates since their respective maximum rates, with the 
largest point declines reported in Michigan, Illinois, Washington, DC, 
and Alabama.
    Credit conditions remain tight. The Federal Reserve's January 
Senior Loan Officer Opinion Survey indicated that, after easing 
slightly in the third quarter of 2010, banks resumed tightening their 
lending standards in the fourth quarter and the tightening continued in 
January 2011. Over the past 3 years the major banks have ratcheted up 
their credit standards to a point that it is very difficult for 
homeowners without superior credit standards to access loans for 
housing.
    Further, builders are finding access to credit even more difficult, 
with very few banks willing to provide AD&C loans. In the fourth 
quarter of 2010, NAHB survey data confirmed that few builders are even 
seeking loans given existing tight credit conditions. Only 17 percent 
of builders sought land acquisition loans in the fourth quarter, down 
92 percent in the final quarter of 2005. Similarly, only 20 percent 
attempted to secure land development loans, down from 89 percent in 
2005. For the single-family market, 40 percent of builders sought 
construction financing in the fourth quarter of 2011, down from 96 
percent for the same period of 2005. Multifamily tells a similar story 
as well, with 19 percent of surveyed membership seeking construction 
financing, down from 82 percent in 2005.
    Data from the fourth quarter of 2010 indicates that of those 
builders reporting tighter conditions 77 percent noted lenders require 
lower loan-to-value ratios, 76 percent indicated that lenders were not 
making new loans at all, 69 percent reported reduced lending amounts, 
59 percent responded that lenders required personal guarantees or 
collateral not connected to the project, and 51 percent indicated 
higher interest rate requirements. Overall, these very tight credit 
standards are holding back housing demand and restricting supply.
    Taken together, NAHB expects above-trend growth of GDP over the 
2011-2012 period, with a modest slowdown in 2012 as fiscal stimulus to 
the economy fades away. NAHB is forecasting year-over-year GDP growth 
of 3.1 percent and 3.5 percent in 2011 and 2012, respectively. With 
respect to home construction, NAHB expects year-over-year growth in 
residential fixed investment to reach 12 percent in 2011 and 26 percent 
in 2012, performances that will contribute about 0.3 and 0.7 percentage 
points to GDP growth in these 2 years.

Current Housing Market Conditions
    House prices have declined in recent months, falling with the end 
of the home buyer tax credit program. All major house price measures 
turned down in the third and fourth quarter of 2010, taking back some 
but not all of the gains achieved since early 2009. However, some of 
the price decline was related to the elevated share of the existing 
home sales market that was attributable to distressed sales. Data from 
RealtyTrac indicates that for 2010, 26 percent of home sales were 
distressed sales, and that homes in the foreclosure process on average 
sold for a 28 percent price discount. Bank-owned homes sold for an even 
deeper discount, a 36 percent reduction on average.
    Despite these recent declines, NAHB expects house prices to 
stabilize in the near term and to post slow growth later this year and 
in 2012 as economic growth produces jobs and improves consumer 
confidence. In many areas, house price-to-income ratios have returned 
to historical levels. On a national basis, the home price to income 
ratio has reached 3.2 (the level it approximately tracked from 1991 to 
1999) after peaking at 4.7 in late 2005.
    As of January 2011, private housing starts totaled 596,000 at an 
annualized rate. This is well below the long-run trend of approximately 
1.7 million new homes that are necessary to accommodate population 
growth and replacement of older housing stock. The gap between current 
production and potential housing construction is a result of multiple 
factors, including builders dealing with excess housing inventory, 
deferred household formations, and lack of AD&C financing.
    Inventories of new and existing homes continue to fall as a result 
of significant declines in housing construction. The National 
Association of REALTORS' estimates that the national 
inventory of existing homes for January 2011 stands at 3.38 million 
homes, a 7.9 months supply of homes at current sales rates. This is 
significantly lower than the 12.5 months supply that was recorded in 
July 2010. In contrast to existing homes, newly constructed inventories 
represent a very small share of total housing inventory. As of January 
2011, the Census reports 188,000 newly constructed homes for sale, a 
7.9 months supply. This is also much reduced from the 11.2 months 
supply level reported in 2008. Such inventory numbers reflect homes 
that are completed, are underway, or not yet under construction. 
Inventories of completed constructed for-sale homes stand at an all-
time low: 78,000 in January 2011, down from 199,000 in January 2009. 
The homebuyer tax credit program was effective in reducing these 
inventories, and we thank the Congress for its support of this 
important program during the Great Recession.
    On the negative side, the inventory of foreclosed homes rose in the 
fourth quarter of 2010, matching the peak level set at the start of the 
year. The foreclosure crisis is unlikely to fade in the near-term, with 
delinquency rates remaining high, providing a steady flow of 
foreclosure starts. While the rate of foreclosures declined in the 
fourth quarter of 2010 to 1.27 percent of all loans outstanding, it was 
only a modest improvement from the peak level of 1.42 percent in third 
quarter of 2009. The foreclosure problem is concentrated however, with 
very high rates of foreclosures started in Nevada (2.95 percent of 
loans outstanding in Q4 2010), Arizona (2.29%), Florida (2.21%), 
Illinois (1.55%), Michigan (1.55%), and California (1.41%). These six 
States also hold almost half of the foreclosure inventory. The large 
number of foreclosed properties on the market will continue to exert 
downward pressure on house prices and stifle demand in these States 
through 2012. In other States less burdened by foreclosures, the 
housing market is likely to be more responsive to the improvement in 
economic activity and declines in the unemployment rate that is 
expected in the near term.
    While much has been made of the excess supply of homes, the demand 
side of the housing market has also contributed to recent weakness. Due 
to high unemployment rates and economic uncertainty associated with the 
aftermath of the Great Recession, many households that were expected to 
form due to simple population growth have not in fact materialized. 
Such individuals may represent children living with parents, roommates 
doubling up, or even divorce-related. NAHB estimates that approximately 
2.1 million household formations have been delayed as a result of 
recent economic conditions. These potential households constitute a 
``shadow demand'' for the Nation's housing markets. As the economic 
picture improves, we expect this demand to be unlocked, helping to 
reduce housing vacancy rates.
    Finally and most importantly in terms of the long-term health of 
the home building industry, low levels of housing construction 
activity, and its spillover economic benefits and job creation, are 
also due to lack of financing available to small- and medium-sized 
builders across the Nation.
    Small businesses are the heart of the residential construction 
sector, which includes single-family and multifamily construction, land 
development and home remodeling. Overall, approximately one-third of 
NAHB's membership is made up of dedicated builders. The remaining share 
of its membership consists of associate members who also work within 
the residential construction sector.
    As measured by workers, 80 percent of NAHB builder members have 
less than 10 employees, with the average member having approximately 11 
employees. Only 1 percent of NAHB builder members have more than 100 
employees. For NAHB's associate members, nearly 90 percent have less 
than 50 employees.
    Approximately 50 percent of NAHB builder members have less than $1 
million in gross receipts, and 86 percent have less than $5 million in 
gross receipts. Approximately 80 percent of NAHB builder members built 
10 or fewer homes in 2010. NAHB's associate members are very similar to 
its builder members with respect to dollar size of business, with 77 
percent having less than $5 million in gross receipts.
    These kinds of small businesses typically rely on debt financing, 
often from regional and community banks. For such businesses, the 
credit crunch persists, and lending conditions are as tight as ever. 
Builders who have local demand to build often cannot access AD&C 
financing, thereby preventing business activity and job creation.

Housing Market Outlook
    The near-term outlook for new housing demand remains sluggish, with 
the NAHB/Wells Fargo Housing Market Index (HMI) for February failing to 
gain ground. The HMI remains at a level of 16, with any reporting less 
than 50 indicating ongoing weakness on the demand side of the new-home 
market and suggesting low levels of single-family production for some 
time.
    These sobering signals have persisted despite record-high readings 
regarding the affordability of home purchases. NAHB's housing 
opportunity index (HOI) reached a new high in the fourth quarter of 
2010. Similarly, consumers' view of the buying conditions for homes 
from the University of Michigan consumer sentiment survey is also very 
high. However, while consumers are aware of the very favorable 
affordability conditions and continued low interest rates (30-year, 
fixed-rate mortgage rates have hovered around 5 percent since mid-
December 2010), other factors, such as concerns over their employment 
situation and income growth, tight buyer credit conditions, and 
inaccurate appraisals, are holding back prospective home buyers.
    Despite some recent downward revisions, NAHB expects slowly 
improving economic and financial market conditions, along with great 
affordability conditions, to support moderate increases in new single-
family home sales and housing production in 2011-2012.
    New single-family home sales and housing production are expected to 
remain weak in the first half of 2011, but will pick up in the second 
half of the year, with momentum building through 2012. NAHB's forecast 
of new home sales shows a modest gain of 8 percent in 2011, before a 
more substantial 49 percent increase in 2012.
    After recent gains, the rate of increase in existing single-family 
home sales is expected to slow in the first quarter of 2011. However, 
we expect that it will return to its strong rate of growth in the 
second quarter, which will carry through to the end of 2012. This will 
return existing single-family home sales to their long-term sustainable 
trend level by the end of 2012.
    Single-family housing starts will follow a similar trend to new 
single-family home sales with an increase of 15 percent in 2011 and 47 
percent in 2012. This will raise the level of single-family starts to 
900,000 units by the end of 2012. While a substantial gain over current 
depressed levels, this is still 40 percent below NAHB's estimate of the 
long-term sustainable trend, based on demographics, replacement needs, 
and second-home demand.
    Multifamily housing starts have experienced great volatility in 
recent months, rising from 89,000 in June 2010 to 182,000 in August, 
back down to 93,000 in November then up to 183,000 in January 2011. 
This variation is expected to continue, with a sharp rise in 
multifamily housing starts expected in the first quarter of 2011, a 
modest decline in the second quarter, before resuming steady growth 
through the end of 2012. Overall multifamily housing starts are 
projected to increase 21 percent in 2011 and 40 percent in 2012, rising 
to 210,000 units in the fourth quarter of 2012, which is still 38 
percent below NAHB's estimate of the long-term sustainable level.
    Residential fixed investment (RFI) experienced only moderate growth 
in the fourth quarter of 2010, with the gains in existing home sales 
(i.e., increase in brokers' commission) countered by weak housing 
production (single-family and multifamily housing starts). Increases 
are expected over the next few years, with the forecasts for housing 
production and home sales generating year-over-year growth in real RFI 
of 12 percent in 2011 and 26 percent in 2012. However, coming from an 
extremely low level in 2010, these gains in RFI will provide only a 
modest contribution to GDP growth, about 0.3 and 0.6 percentage points 
respectively, in those 2 years.

Policy Implications
    Given housing's ongoing weakness in the economy, NAHB urges 
Congress to approach housing policy with due caution. Several housing 
policies loom on the horizon, and if treated inappropriately, they have 
the potential to harm the housing sector, thereby hurting the savings 
of the Nation's 75 million homeowners, as well as the ability of the 
residential construction and real estate industry to contribute to the 
economic recovery.
    First, NAHB urges Congress to agree to definite solutions to the 
issue of the GSEs that ensure a functioning housing finance system that 
provides credit to home buyers on reasonable terms. The housing market 
faces a strong possibility of a double dip characterized by strong 
price declines and significant declines in sales volumes if homebuyers 
do not have reasonable access to credit. In the short-term, the 
conforming loan price limits for mortgages will adjust downward, which 
could place downward price pressure on affected, high-cost markets. It 
is useful to remember that FHA and GSE guarantees currently cover 
approximately 90 percent of mortgages issued today.
    Second, there has been increased attention paid to the Federal 
Government's budget situation. The state of the Nation's public 
finances is critical for homebuyers and home builders. A large Federal 
deficit can absorb savings that might be used for investment in 
housing, thereby leading to higher interest rates, increasing borrowing 
costs for small businesses and crowding out potential homebuyers. 
However, most economists believe the state of the Federal Government's 
fiscal path is unsustainable, prompting cries of reform, both for 
Government spending and tax policy. And a target for some within this 
debate is the mortgage interest deduction (MID), arguably the most 
important tax rule for homebuyers and homeowners in the U.S.
    It is important to keep in mind that the deduction for mortgage 
interest is solidly a middle class tax break. Nearly 70 percent of the 
benefits of the MID is collected by homeowners with less than $200,000 
in income. In 2012, the tax expenditure for the MID--roughly its budget 
size--is estimated by the Joint Committee on Taxation as $94 billion. 
While a large number--not surprisingly as more than 35 million 
homeowners will benefit from the MID directly in 2012--this amount 
totals to only 3.7 percent of expected tax collections in that year. 
Under realistic policy estimates, a total repeal of the MID would 
likely collect $75 million or less, as homeowners restructure their 
finances, increasing tax collections by only about 3 percent (or half a 
percentage point of GDP). This is not responsible for, nor can it fix, 
the Nation's fiscal challenges.
    Other housing tax rules, such as the capital gain exclusion, the 
real estate tax deduction, and the Low-Income Housing Tax Credit 
(LIHTC), are well-established housing policies, which if eliminated or 
weakened would result in wealth losses for homeowners (in the case of 
the gain exclusion) or the abandoning of a successful policy that 
facilitates the production of affordable housing (in the case of the 
LIHTC).
    Regulators should also proceed with caution as they implement last 
year's financial reform legislation (Dodd-Frank). A determination needs 
to be made regarding what constitute a qualified residential mortgage 
(QRM) that would be exempt from the law's risk retention rules. An 
excessive down payment requirement, such as 20 percent, would squeeze 
first-time homebuyers out of the housing market for years to come, 
preventing household formations and producing economic damage to the 
overall economy.
    Finally, and most importantly for the Nation's small home builders, 
Congress, regulators, and financial institutions must work to unblock 
the AD&C lending channels, to permit home builders to contribute to the 
economy where and when housing demand emerges as the economy improves. 
Without access to credit, the residential construction industry will 
lose more small businesses and experience more job losses, with these 
impacts being widely spread across the Nation.
    With this in mind, NAHB has presented banking regulators with 
specific instances of credit restrictions; provided data showing no 
difference in credit access across market conditions and requested 
specific changes to current regulatory guidance. To date, these efforts 
have not produced any tangible results. With the spigot for housing 
production loans cut off, and threat that the uncertainty from Dodd-
Frank rulemaking will further affect the ability of small community 
lenders to service the credit needs of the home building industry, it 
is clear that Congressional action is needed to help open the flow of 
credit to home builders. Without such action, there can be no housing 
recovery, which has major implications for our Nation's ability to 
recover from the current economic downturn. NAHB has outlined a formal 
legislative blueprint to Congress detailing key legislative elements 
critical to help ensure adequate credit availability to home builders. 
Three of these key elements focus on fixing specific instances of 
regulatory excess, while the final element aims to address the ability 
of the Small Business Administration (SBA) to meet the credit needs of 
small home builders. In the coming weeks and months, NAHB will be 
working with Congress to address these critical issues and seek 
congressional action to address each specific concern.
                                 ______
                                 
                    PREPARED STATEMENT OF RON PHIPPS
        President, National Association of Realtors'
                             March 9, 2011

Introduction
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, on behalf of more than 1.1 million REALTORS' who 
are involved in residential and commercial real estate as brokers, 
sales people, property managers, appraisers, counselors, and others 
engaged in all aspects of the real estate industry, thank you for 
inviting me to testify today regarding the current state of the 
Nation's housing market. I am also speaking on behalf of the 75 million 
American families who own homes and the 310 million Americans who 
require shelter.
    My name is Ron Phipps. I am a 3rd generation member of a 4 
generation family tradition in the Rhode Island residential real estate 
industry. My passion is making the dream of home ownership available to 
all American families. As direct result of my passion, I have become 
very active within the National Association of REALTORS' 
(NAR); holding significant positions at both the State and national 
levels. Since 2000, I have been President of the Rhode Island 
Association, a NAR Regional Vice President, and a member of the NAR 
Executive Committee. Currently, I am the 2011 NAR President.
    Most Americans understand the value of home ownership. They measure 
their financial wellness in large part with home ownership and with the 
equity they have in that home. Home ownership provides them with 
shelter. Owning one's home is the first commandment of self-reliance 
for most families. Most Americans understand the value of buying a home 
and over time paying the mortgage off. More Americans rely on this 
tangible asset for their confidence in their own financial situation, 
the overall financial well-being of the country, and the strength of 
these United States: ``Life, Liberty, and the Pursuit of Happiness'' 
was Life, Liberty and Property in the first draft by Jefferson.

Current Housing Trends
    The housing climate continues to be erratic. Mortgage rates have 
jumped from their exceptionally low levels of last year, and are likely 
to rise even further. Of course, REALTORS' expected mortgage 
rates to increase--that is not unusual as an economy comes out of 
recession and moves into recovery.
    However, consumer malaise continues to prevail in the overall 
economy, effectively retarding the housing recovery. NAR believes that 
the economy may not be able to rely heavily on those consumers with 
stable jobs to help with economic recovery. A solid stock market 
recovery has lifted wealth for some, but many consumers historically 
have relied on the wealth tied to their housing equity for confidence. 
These consumers are now staring at a much lower household net worth in 
the aftermath of a painful housing market bust. Furthermore, many 
homeowners who refinanced last year into historically low rates 
interestingly brought more cash to the table, thus lowering their 
overall mortgage debt--perhaps to further increase their ability to 
repay their obligation and/or to improve their equity position. The 
lowering of debt is a healthy trend for the long-haul, but it also 
means less money available for current spending and current economic 
growth.
    Historically, the housing market has been a major power engine for 
economic growth, particularly coming out of a recession. This does not 
seem to be the case this time. Additional foreclosures and a shadow 
real estate owned (REO) inventory loom. As a result, housing starts may 
only reach 700,000 units in 2011--half the normal historical annual 
production, though an improvement from the 554,000 and 586,000 starts, 
respectively, in the past 2 years. That implies little addition to 
economic growth. It also implies a potentially faster than expected 
``cleaning up'' of what has been a bloated housing inventory, 
particularly as existing-home sales pick up.
    Since jobs are now being created, albeit at a slower than desired 
rate, existing-home sales will likely see some improvement in 2011. 
Changes in median home prices will be determined by how fast the 
inventory is worked off. Assuming that the pace of home sales can hold 
at near 5.3 million units, as occurred in the final month of last year 
and in January (with swings in home sales induced from the existence 
and absence of the homebuyer tax credit largely over), then the 
inventory absorption rate should keep home values broadly stable. This, 
combined with the continued reduction in builder activity--resulting in 
a 40-year low on newly constructed inventory--should help absorb some 
of the distressed shadow inventory that will be reaching the market.
    NAR expects local housing market recovery paths in terms of both 
sales and prices to follow in the footsteps of local job market 
conditions. Those metros with reasonably healthy job creating markets 
have so far been Washington, DC, Boston, Minneapolis, and Seattle. The 
local economies with energy exposures such as those of Alaska, North 
Dakota, Oklahoma, and Texas are also doing relatively well. 
Improvements to jobs are helpful for home sales. We also need to be 
mindful that improved home sales help create jobs. Research suggests 
that one million additional home sales in 2011 over 2010 will mean 
500,000 private sector jobs created in the country. Meaning, jobs and 
the housing market go hand-and-hand.
    The housing bust of recent years has unfortunately forced as many 
as 11 million homeowners in to underwater situations and the aggregate 
homeowner wealth has declined. The median net worth--the value of 
everything owned minus everything owed--for a homeowner is estimated to 
have fallen from $230,000 in 2007 to about $170,000 in 2010. However, 
the net worth of homeowners still outpaces that of a typical renter, 
which is only $4,000 to $5,000. That is a testament to long-term 
benefits for homeowners who steadily pay down mortgage.
    Aside from the eventual financial benefits gained over many years 
for homeowners, let's not lose sight of the intangible societal 
benefits of home ownership: better communities, higher civic 
participation, lower juvenile delinquency, higher pupil test scores, 
and higher voter participation rates among home-owning families versus 
tenant (rental) households. As we continue to discuss the future of 
housing finance, we must consider the intangible social stability that 
arises from having a super majority of the population that are property 
owners. REALTORS' are not suggesting that home ownership 
will cure society's ills, but the U.S. has seen the benefits of home 
ownership and private property rights that are protected by our 
Constitution.

 Housing Recovery Impediments
    The belief in home ownership as a pillar of American society is why 
REALTORS' are reaching out, with great concern, to the 
national association to better understand the intentions of the 
Administration, Congress, and numerous regulatory bodies that are 
perceived as actively working to devalue, or place severe obstacles in 
the path of, home ownership. REALTORS' agree that reforms 
are required to prevent a recurrence of the housing market meltdown, 
but unnecessarily raising down payment will have ramifications for the 
overall economy, as well as housing. According to Exhibit 5-3 from 
NAR's 2010 Home Buyer and Seller Profile (released November 2010), 41 
percent of repeat buyers and 70 percent of first-time homebuyers had 
down payments of 10 percent or less of their home's purchase price (see 
chart below).



    Congress intended to create a broad exemption from risk retention 
for historically safe mortgage products. REALTORS' believe 
that Federal regulators should honor Congressional intent by crafting a 
qualified residential mortgage (QRM) exemption that includes a wide 
variety of traditionally safe, well underwritten products such as 30, 
15, and 10 year fixed rate loans, 7-1 and 5-1 ARMs, and loans with 
flexible down payments that require mortgage insurance. The QRM is 
likely to shape housing finance for the foreseeable future and is 
therefore very important. Another reason QRM is important is that it 
serves as a precursor for what the future GSE is likely to be eligible 
to securitize. A poor QRM policy that does not heed the Congressional 
intent will displace a large portion of potential homebuyers, which in 
turn will slow economic growth and hamper job creation.
    Furthermore, frequent increases in fees from both FHA and the GSEs 
and credit overlays from lenders will unnecessarily increase the costs 
to homebuyers and discourage these consumers, who can otherwise afford 
a mortgage, from participating in the housing market. By some 
estimates, 10-15 percent of otherwise qualified buyers with a 
demonstrable ability to repay will be turned away due to the overly 
stringent requirements. This represents approximately 500,000 home 
sales that won't happen, further dragging out the housing and economic 
recovery. (Every two additional closed real estate transactions can 
create one job, 500,000 sales can produce 250,000 additional jobs.)
    REALTORS' believe that the pendulum on mortgage credit 
has swung too far in the wrong direction and it is hurting consumers 
and the economy. The harmful products that led to the bubble and crash 
are gone and no one is looking to bring them back, but making it harder 
for those who can afford a safe mortgage does not further the goals of 
recovery.
    As we have mentioned in prior testimony before this Committee and 
the House Financial Services Committee, reduced home buying activity 
hurts numerous businesses that are part of the housing industry (e.g., 
home renovation, remodeling, furnishing, etc.) and our State and local 
governments through reduced tax revenues. So, even though it is our 
belief that housing will not pull us out of this recession alone, the 
hampering of its recovery will severely, negatively impact any recovery 
that is, or soon to be, underway.

Conclusion
    President Thomas Jefferson dreamed of a well-functioning and self-
governing democratic society evolving from a Nation of agrarian land-
owning families. During the World War II era, President Franklin Delano 
Roosevelt said that a Nation of homeowners is unconquerable. President 
Ronald Reagan advocated the need to preserve the mortgage interest 
deduction in order to promote the one important aspect of the American 
Dream--home ownership.
    The idea of home ownership has been attacked from many quarters 
because of the housing bubble and subsequent bust. Many mistakes were 
made during the cycle. However, as the country takes a critical look at 
Federal housing policy, let's not lose sight of the immense intangible 
value of home ownership--sustainable home ownership--to our country.
     The National Association of REALTORS' sees a bright 
future for the housing market and the overall economy. However, our 
members are well aware that the future we see rests on the industry's 
and the economy's ability to successfully navigate some significant 
obstacles. Congress and the housing industry must maintain a positive, 
aggressive, forward-looking partnership if we are to ensure that 
housing and national economic recoveries are sustained.
    I thank you for this opportunity to present our view of the state 
of the Nation's housing market. As always, The National Association of 
REALTORS' is at the call of Congress, our industry partners, 
and other housing stakeholders to help facilitate a sustainable housing 
and national economic recovery.
                                 ______
                                 
                  PREPARED STATEMENT OF JEFFREY LUBELL
             Executive Director, Center for Housing Policy
                             March 9, 2011

    I am the Executive Director of the Center for Housing Policy, a 
research organization based in Washington, DC, working to expand 
awareness of the Nation's housing challenges and to identify proven and 
promising strategies for meeting those challenges. In addition to 
analyzing relevant and timely data, we draw on the expertise of the 
broad range of practitioners that belong to our affiliate, the National 
Housing Conference.
    My testimony this afternoon will focus on housing affordability 
trends. The bottom line is simple and perhaps counterintuitive: despite 
several years of falling home prices, housing affordability has 
worsened for low-and moderate-income households. In 25 States, the 
share of working households severely burdened by their housing costs 
rose significantly between 2008 and 2009, while no State saw a 
statistically significant decline. Lower home prices primarily benefit 
those in the market for a new home, and renters face steady or rising 
costs and more competition for low-cost units. For both owners and 
renters, falling incomes and a grim employment picture have contributed 
to the erosion of housing affordability.

Worst Case Housing Needs
    Housing affordability is often a concern for renters with the 
lowest incomes. There were approximately 17.1 million very low-income 
renters in 2009, and a recent study by the U.S. Department of Housing 
and Urban Development (2011) found that:

    7.1 million (41 percent) had worst case needs, spending 
        more than half of their income on housing costs, living in 
        substandard housing, or both, without receiving Government 
        rental assistance.

    The number of renters with worst case needs has increased 
        by nearly 42 percent since 2001. (See, Figure 1 in the 
        Appendix.) Between 2007 and 2009, the number rose by 1.2 
        million households--or 20 percent. A 2-year increase of this 
        magnitude is unparalleled in at least the last 25 years.

    Only 60 affordable and adequate units were available for 
        every 100 very low-income renters in 2009.

    Increased competition for affordable units, falling 
        incomes, and a shortage of rental assistance are the primary 
        factors driving the recent increase in worst case needs.

    In 2009, families with children made up 39 percent of all 
        renters with worst case needs, representing the most common 
        household type. However, renters with worst case needs are far 
        from homogenous, representing all household types, races/
        ethnicities, and residential settings.

Low- and Moderate-Income Working Families
    But housing affordability concerns are not limited to very low-
income renters. Another recent study--this time by the Center for 
Housing Policy--found high levels of severe housing cost burden among 
working families--both renters and owners--spanning a broad income 
range. In 2009, there were 46.2 million households in the United States 
that averaged at least 20 hours per week in the workplace and earned no 
more than 120 percent of the area median income. Our study (Wardrip 
2011) found that:

    Nearly one in four working households had a severe housing 
        cost burden in 2009, spending more than half of their income on 
        housing. More than 10.5 million working households experienced 
        this cost burden--an increase of 600,000 households in only 1 
        year.

    The share of working households with a severe housing cost 
        burden increased significantly in 25 States between 2008 and 
        2009, while no States saw a statistically significant decrease. 
        (See, Figure 2 in the Appendix.)

    Roughly 80 percent of working households with extremely low 
        incomes (below 30 percent of the area median income) had a 
        severe housing cost burden. However, housing costs burden 
        working households of all incomes and tenures, from coast to 
        coast. (See, Figure 3 in the Appendix.)

    Working renters reported working fewer hours in 2009 than 
        in 2008, and nominal household incomes declined by 4 to 5 
        percent for working renters and owners.

Rural Housing Challenges
    Housing issues in rural America are often over-shadowed in policy 
discussions, but one-fifth of all U.S. households live in rural 
communities. Many of the same housing concerns associated with urban 
areas are also of concern in rural areas.

    Roughly 3.4 million households in nonmetropolitan areas 
        spent half or more of their income on housing in 2009. 
        Approximately 40 percent were renters. \1\
---------------------------------------------------------------------------
     \1\ Housing Assistance Council's tabulations of the 2009 American 
Housing Survey public use files.

    Although housing quality in rural areas has improved 
        markedly during the last several decades, it remains an issue 
        for many. According to data collected in 2009, approximately 
        1.5 million rural households lived in substandard housing 
---------------------------------------------------------------------------
        (Housing Assistance Council 2010).

    Among the 3.1 million very low-income renters in 
        nonmetropolitan America, some 1.1 million--or 36 percent--had a 
        worst case need in 2009, either spending more than half of 
        their income on housing costs or living in severely inadequate 
        conditions. This rate is close to that of renters with similar 
        incomes in central cities and the suburbs (42 to 43 percent) 
        (HUD 2011).

    Despite lower housing costs generally, rural areas lack a 
        sufficient number of units for their very low-income renters. 
        Fewer than 73 units were affordable, available, and adequate 
        for every 100 very low-income renters in nonmetropolitan areas 
        in 2009 (HUD 2011).

Homelessness
    Even in the best economic times, a substantial number of families 
and individuals go to bed each night without a permanent roof over 
their heads. The sagging economy and persistently high unemployment 
rate have not only eroded housing affordability for those with homes of 
their own but also made it increasingly difficult to address 
homelessness.

    The number of people who were homeless on a given night in 
        2009 increased by 3 percent from 2008 to 2009, rising to 
        approximately 656,129. \2\ The homeless population increased in 
        30 States and the District of Columbia (Sermons and Witte 
        2011).
---------------------------------------------------------------------------
     \2\ HUD (2010) reported to Congress that there were 643,067 
homeless persons in January 2009, a decrease of 3.2 percent from 2008. 
These estimates include three communities with which HUD expressed some 
methodological concerns. Sermons and Witte (2011) adjust the counts 
from these communities and make other adjustments to arrive at their 
estimate of over 656,000 homeless persons and an increase of 3 percent. 
HUD notes that removing the three problematic estimates suggests that 
homelessness rose by 2.1 percent, a finding more closely in-line with 
Sermons and Witte (2011).

    Over 1.5 million people used the shelter system during the 
        12 months ending September 30, 2009 (HUD 2010). Although the 
        number of people seeking shelter has inched down over the last 
        2 years (-1.9 percent), the number of households with children 
        doing so has increased from 131,000 to 170,000 over the same 
---------------------------------------------------------------------------
        time period (HUD 2010).

    The population living in doubled-up situations for economic 
        reasons--a common living arrangement prior to homelessness--
        rose to over 6 million people in 2009, an increase of almost 12 
        percent in 1 year (Sermons and Witte 2011).

Multifamily Housing Markets
    Much of the Nation's affordable housing (whether assisted or 
unassisted by Government subsidies) is in multifamily properties. This 
sector is still recovering from the effects of the recession and the 
capital market disruptions, so affordability challenges will persist. 
The lack of financing and uncertainty about future demand greatly 
slowed the pace of new apartment construction, the effects of which 
will persist for at least 1-2 years. A recent Marcus & Millichap (2011) 
report expects only 53,000 new apartment completions in 2011, down 46 
percent from last year and far less than the expected 158,000 new units 
demanded. In general, the renting of foreclosed single-family homes 
does not significantly offset the shortage of new apartments--these 
houses are priced higher, more costly to maintain, in inconvenient 
locations for renters, and difficult to manage efficiently as rental 
properties.
    Reliable capital flows are still a barrier to sustained multifamily 
production as well. Debt capital is still primarily Government backed, 
with the GSEs and FHA providing more than 90 percent of new 
originations. Equity investment interest is once again growing due to 
projections of rising demand and stronger yields. Demand for Low Income 
Housing Tax Credits (LIHTC) has rebounded somewhat from the devastating 
retreat of equity capital in 2008-9, although demand and pricing are 
generally substantially below their peak. Properties in stronger, 
mostly coastal housing markets command far more investor interest than 
other areas.

Impact of Rising Energy Prices
    Living costs are not limited to the costs of shelter. Families also 
must pay for utility costs as well as the transportation costs of 
getting to and from work and around town. Research conducted by the 
Center for Housing Policy and the Center for Neighborhood Technology 
found that moderate-income working families (incomes of $20,000 to 
$50,000 in 2000) in the 28 metro areas studied actually spent slightly 
more for transportation (30 percent of income) in 2000 than their 
combined housing and utility costs (28 percent of income), with the 
costs for both heavily dependent on how close they lived to jobs and 
public transportation (Lipman 2006). Cities like New York City, with 
high housing costs, often had comparatively low transportation costs, 
while cities like Houston and Cincinnati, with low housing costs, often 
had comparatively high transportation costs.
    While updated data on the combined burden of housing, 
transportation, and utility costs will not be available until next 
year, one thing is clear: Low-and moderate-income families are highly 
vulnerable to rising energy prices. Everyone will pay more in utility 
costs as energy prices rise, reducing affordability even further. 
Families that live far from their places of employment and in auto-
dependent communities will bear a double burden as their transportation 
costs rise along with their utility costs.

Conclusion
    Housing prices have fallen sharply over the past several years. For 
those buying a home today, affordability has certainly improved. 
However, affordability has not improved for America's renters and 
owners more generally. For renters as well as homeowners who stay in 
place, monthly housing costs have largely remained stable or risen, 
while unemployment and under-employment have reduced incomes for many. 
The rising demand for low-cost units and the sharp drop-off of 
multifamily production in recent years have exacerbated the already 
significant shortage of affordable and available units. In short, far 
from improving it, recent economic and housing market trends have 
significantly worsened housing affordability for America's low-and 
moderate-income households. Rising energy prices will likely further 
exacerbate families' affordability challenges in the years to come.





Works Cited
Housing Assistance Council, ``Housing in Rural America'', Washington, 
    DC: Author, 2010.
Lipman, Barbara, ``A Heavy Load: The Combined Housing and 
    Transportation Burdens of Working Families'', Washington, DC: 
    Center for Housing Policy, 2006.
Marcus & Millichap Real Estate Investment Services, ``Real Estate 
    Investment Research: National Apartment Research'', Phoenix, AZ: 
    Author, 2011.
Sermons, M. William, and Peter Witte, ``State of Homelessness in 
    America: A Research Report on Homelessness'', Washington, DC: 
    National Alliance To End Homelessness and Homelessness Research 
    Institute, 2011.
U.S. Department of Housing and Urban Development, Office of Policy 
    Development and Research, ``The 2009 Annual Homeless Assessment 
    Report to Congress'', Washington, DC: Author, 2010.
U.S. Department of Housing and Urban Development, Office of Policy 
    Development and Research, ``Worst Case Housing Needs 2009: Report 
    to Congress'', Washington, DC: Author, 2011.
Wardrip, Keith, ``Housing Landscape 2011: An Annual Look at the Housing 
    Affordability Challenges of America's Working Households'', 
    Washington, DC: Center for Housing Policy, 2011.

    I am pleased to acknowledge the assistance of Keith Wardrip, a 
senior research associate at the Center for Housing Policy, and Ethan 
Handelman, Vice President for Policy and Advocacy at the National 
Housing Conference, in preparing this testimony.
