Beyond the Recession: The Great Housing Rebalance

Bruce Katz
Bruce Katz Founding Director of the Nowak Metro Finance Lab - Drexel University

April 13, 2011

During an appearance at the Michigan Conference on Affordable Housing, Bruce Katz described how metropolitan areas will benefit from fundamental changes to U.S. housing policy.

INTRODUCTION: Thank you for the opportunity to speak today.

Your gathering takes place at a pivotal moment for housing in the United States.

The ravages of the housing collapse and the broader recession it precipitated remain in painful evidence. 

Since the peak of the housing bubble, home prices across the nation have fallen by an average of 18.5 percent, a trend that has continued through the fourth quarter of 2010. The 100 largest metros have fared, on average, even worse, with home prices decreasing by 23.6 percent from peak value in 2006.

But the impact of the housing crisis has not been uniform. 

Some states, such as Texas, have weathered the housing crisis better than others, and some of its metro areas have recently even seen growth in home prices.  Others, like Florida, California, Arizona, and Nevada, continue to be the hardest hit areas, with home values declining by over 50 percent in some metro areas since the housing crisis began.

Michigan’s large metros were almost as hard hit by the housing downturn as many of the Sun Belt metros. In the Detroit Metro area, home prices have fallen by 42 percent from peak value in 2005, and have continued to decline through the fourth quarter of 2010. Grand Rapids has also experienced a steep decrease in home values, declining across the metro by 26 percent since 2005. 

These metros also rank among the worst performing in terms of home foreclosures. In Detroit, there are approximately 12 bank-owned homes per 1,000 mortgageable properties and nearly seven out of every 1,000 in Grand Rapids. By contrast, the average across the top 100 metro areas is five and the average for the entire United States is four per 1,000 mortgageable properties.

As bad as these barometers are, they would be a lot worse if the federal government had not taken aggressive steps to prevent foreclosures, stabilize hard hit neighborhoods, boost demand, ensure access to capital and put in place a regulatory architecture to protect consumers and curb abuses going forward.

My remarks today, however, are not focused on the past or even the present.  I want to focus on the future of housing and housing policy in the United States.

Like the Great Depression, the Great Recession is a turning point for the American economy generally and the housing sector specifically.  Simply put, there will be no return to normal since what preceded the recession was anything but normal

It is not sufficient to simply clean up the mess and move on.  We need to deliberately, purposefully engage in a broader restructuring of housing policy that aligns with profound demographic, environmental and economic changes underway in our country.

We must, in short, ensure that the Great Recession is followed by a “Great Housing Rebalance.”

I believe this rebalancing should have three central components.

First, we must drive a rebalancing between homeownership and rental housing.  As HUD Secretary Shaun Donovan said in congressional testimony last year, “The crisis reaffirmed the need to achieve a better balance between ownership and rental housing and to provide more options—and better options—for families.”  He is absolutely on target.   Current policy has distorted tenure choices in the United States.  That needs to change to align housing policy and production with the demographic transformation underway in the nation. 

Second, we must drive a rebalancing between housing and the environment, at the scale of both individual buildings and the built environment writ large.  Residential housing and the built environment are major contributors to energy consumption and global warming.  It is inconceivable that we can meet new energy and environmental imperatives unless we rewire the housing sector and development patterns more broadly for reduced energy. 

And, finally, we must drive a rebalancing between the housing sector and the productive, trade-able sectors of our economy.  The Great Recession has been a wake up call for this nation.  It revealed an economy dangerously out of whack, characterized by debt, frenzied with consumption, where housing became a leading rather than derivative sector. 

We must now move to an economy that is driven by exports, powered by low carbon, fueled with innovation, and rich with opportunity.  We must make things again in the U.S.

Housing will necessarily take a secondary, more appropriate role in this next economy.  But this doesn’t mean that housing outcomes will worsen.  In fact, just the opposite.  If we build a productive and sustainable economy, more people will be employed with better wages and more decent benefits.  If anything, the housing outcomes should be improved.

As a recent Wall Street Journal op-ed put it:  “American policymakers got it backwards: In the long run, jobs support housing, not the other way around.”

Achieving this “Great Rebalance” will require major shifts in policy and dramatic change in how markets function.  Positive steps are already underway and smart proposals are under consideration.   But make no mistake.  To do what I am proposing will require some significant reforms to some of the most sacred elements of housing policy, including the mortgage interest deduction.

Read the full speech on the housing market » (PDF)