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The Housing Market Isn't Fixed

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In recent weeks the press has been filled with cheery reports of a near-miraculous recovery in the housing market. Unfortunately, the situation in the real world isn't quite so simple or so cheerful. Since rumors are circulating once again that Federal Housing Finance Administration Acting Director Ed DeMarco is getting ready to leave, this is a good moment to consider the state of federal housing policy.

Actually, it might be a good moment to have a federal housing policy. It's not clear that we do right now.

DeMarco has been controversial, largely due to his resistance to principal reduction for underwater mortgages. Lots of us have taken issue with that position, and some advocates and officials have called for DeMarco to go. In any case, there is work to be done if we want a housing market that works for ordinary Americans.

Bear in mind that while the overall economic recovery may be going pretty well for some, others might say, "What recovery???" For example, the unemployment rate for 16-to-25- year-old white, non-Hispanic males who've graduated high school but haven't been to college is 16.6 percent. That's pretty alarming, double the national average and markedly higher than the rate for those with a college degree. But if you're in that same group of young adult high school graduates and happen to be black instead of white, you're facing a Great Depression-level unemployment rate of 31.6 percent (thanks to RemappingDebate.org for their excellent number-crunching).

About that housing recovery: Yes, it's happening, but this rising tide is definitely not lifting all boats. Geographically, it's been wildly uneven. Florida, for example, is still in deep trouble, with home prices still about 40 percent below their highs and one out of eight mortgages in some stage of the foreclosure process. Ouch.

And things aren't quite coming up roses even in the places where values have been rebounding. In Sacramento, Calif., for example, reports indicate a troubling set of factors are coming together: Inventories are tight, in part because 150,000 homeowners in the region still owe more than their home is worth. Investors, meanwhile, have snatched up so many of the available homes that bidding wars have erupted for the relatively few properties on the market.

A major loser in all this is the working family that's been carefully saving for a down payment in hopes of buying an affordable home as a step toward financial security and asset-building.

But even for those with steady incomes and some savings, big hurdles remain. Interest rates are low but credit is tight. In California and some other places, investors and wealthy buyers purchasing second homes make up a historically high percentage of the market -- often paying cash and crowding out the proverbial little guy trying to qualify for a loan.

In the interest of stabilizing the banking system and avoiding the insane risk-taking that happened during the bubble, federal officials have implemented or are in the process of implementing various rules designed to curb risky mortgage lending, ensure that banks can't offload all of the risks they take, and increase the amount of capital that banks need to have on hand. These rules serve a worthy purpose and most of the ones we've seen so far have been pretty well crafted. But there is a danger of over-correcting, tightening down the credit hatches so firmly that some worthy borrowers get shut out of a home-buying market that's increasingly dominated by investors and the wealthy.

Many of those shut-out potential buyers will be people of color -- who, due to historical discrimination, tend to have less equity and savings and are more likely to have had their credit ratings damaged by temporary factors like an unforeseen job loss. Millions of hard-working and responsible Americans risk being shut out of the opportunity to own their own home, with all that implies for building the wealth and assets that can help a family get through rough times and have something to pass along to their children.

We urgently need a proactive federal housing policy -- one that's smart and agile enough to avoid bubble-era recklessness while keeping the door to homeownership open for hard-working and responsible but non-wealthy Americans. We need officials to be willing to look at the ways in which well-meaning policies can do unintended harm to some communities (the racial equity framework published by The Greenlining Institute last year is one lens for doing that) and then act to fix them.

The positive signs coming from the housing market right now aren't totally a mirage, but the overall numbers mask deep dysfunction lurking just beneath the surface. If Washington lets housing continue to simply drift while blindly believing that everything is getting better, that dysfunction will only get worse.