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4 Reasons Why Housing Wasn't an Issue in the State of the Union

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In tonight's speech, President Obama mentioned housing twice. First, at the start of the speech, he included the "rebounding housing market" as part of his victory lap. Second, he called on Congress to "send me legislation" that would protect taxpayers from paying for another housing crisis while keeping alive the "dream of homeownership." That line was vague, and it didn't bring down the house. What he meant was made clearer in the companion policy fact-sheet: Obama was referring to the four principles for housing-finance reform legislation that he outlined last August.

Why nothing new or specific about housing? There are plenty of housing issues that President Obama might have talked about. Affordability is worsening, mortgage credit appears tight, and delinquencies and foreclosures are still too widespread. Why did none of these make the final cut? Four reasons. The housing policies that Obama might have talked about were either:

1) Not pressing enough. The housing market is in the best shape of Obama's presidency. Construction and sales in 2013 were both at their highest levels since before he took office, and prices have bounced back to within range of their long-term norms. Two of Obama's main housing initiatives during his first term are less essential today:
  • Refinancing is less of a financial slam-dunk for households now that mortgage rates have risen.
  • Loan modifications are less urgent because rising prices and a strengthening economy have lifted millions of borrowers back above water and reduced the share of mortgages in default.
2) Mostly settled. A key measure to prevent a repeat of last decade's crisis is now in place: the most contentious elements of the qualified mortgage / ability-to-repay and qualified residential mortgage rules were hammered out last year, and QM is now in effect. While the impact and evolution of these rules is still to be seen, the main features of the rules themselves have been settled.

3) Too local. Affordability concerns are growing, as prices and mortgage rates climb up from low levels, but affordability is a local, not national, crisis. In San Francisco, just 14% of homes for sale are within reach of a household with median local income, versus more than 80% in some metros in the Midwest and South. One key solution to an affordability crisis is also local: more construction in markets where demand is strong but supply is held back by regulations and other constraints.

4) Too messy. The huge, looming housing question is how to reform or replace Fannie Mae and Freddie Mac. The "send me legislation" line repeated Obama's call last August for Congressional action on Fannie/Freddie reform. But tonight he didn't reveal any new thinking on the fundamental challenge: how to keep the 30-year fixed-rate mortgage relatively cheap and widely available while minimizing taxpayer exposure to the next housing meltdown. Any housing-finance reform that could achieve that would be too complicated, too dependent on Congress, and would take too long to succeed for a speech about a "year of action."