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Economist Examines Housing Prices, Recovery Plans

ROBERT SIEGEL, host:

Joining us now to talk about some of the issues raised by Yuki Noguchi's report from Las Vegas is Karl Case who is co-founder of Standard & Poor's Case-Shiller Housing Price Index. He's a professor of economics at Wellesley College, and he joins us from Wellesley, Massachusetts. Welcome to the program.

Dr. KARL CASE (Professor of Economics, Wellesley College): A pleasure to be here.

SIEGEL: And first, let me ask you. We've heard about Las Vegas. Is the situation that Yuki reported on typical of what's gone on around the country, or is it in some respects unique?

Dr. CASE: Well, there's common elements around the country, but there's elements of uniqueness too. I mean, the Midwest had a house price decline largely because the economy went sour back in the early part of this decade. In the meantime, the East and West Coasts were doing very, very well, but they went way up in value. There never was a housing bubble in the Midwest. There was in the East and West Coast.

And then in the South and Florida and Arizona and in Nevada, there was a speculative bubble that just blew everything else away. So the conditions that led to these falling house prices are different in a way, but they have a common element, namely the expansion of the subprime market which pushed the low end of the housing market into huge inflation in the middle of the decade.

SIEGEL: Well, we heard reference to people out in Las Vegas, all of whom are upside-down on their mortgages, that is they now owe more than what the house is worth on the house than what the house is worth in today's market. What's the current estimate of how many such people in the country are in that situation, first?

Dr. CASE: Well, estimates range from eight up to 14 million. But I think the figure closer to 12 or 13 is the one I kind of subscribe to. It's hard to really know because you don't know what's happened to prices in detail. We only know in particular areas how much prices have gone down and what the corresponding mortgage values are. I'd say it's about 12 or 13 million. That's a big number, though.

SIEGEL: Keeping those people in mind, have you been able to detect any consensus coming out of Washington as to what the solution is? Is it to get house values back up again? Is it to reduce the mortgage debt significantly? Is it to let the chips fall where they may in the market?

Dr. CASE: Now, there is an emerging consensus. Most people agree that we really want, for a lot of reasons, to prevent foreclosures from happening. It causes a lot of hardship for the families involved. It creates extra costs in terms of the property being vacated and potentially vandalized. There are neighborhood effects that when your value goes down and you walk from your property and it goes out on fire sale, the values of neighboring homes go down. So the focus is clearly in Washington now on these foreclosures and can we correct the problem for the people who are underwater in a way that will keep them in their homes.

All of the proposals that I've seen really basically involve restructuring in a way. You do one of three things. You can extend the terms of the loan. You can reduce the interest rate on the loan. Or you can reduce the principal, which is the last resort. All of which is designed to get the homeowner to stay in the house and keep paying on the loan. But there are some things that are making that very difficult to do because to be effective in terms of stabilizing the housing market, keeping prices from falling further, it's got to be done on a large scale, and it's tough to figure out how to do that.

SIEGEL: If the object, in part, is to keep housing prices from falling any further, is that a polite way of saying that it's in the government's interest to inflate the bubble once again, a little bit, get those values up perhaps higher than they might reasonably be otherwise right now?

Dr. CASE: Well, the bubble parts of the country are in a way not the problem. It's the bottom end that - well, the bottom end did have a bubble. I mean, the bottom end found this expansion of credit to low-income people pushing prices up a lot. And in a way, it is trying to preserve some of that because if it all came crashing down on the heads of the banking and financial system at once, it's - you can see what it's done. It's created a worldwide financial crisis. So what it's really designed to do is prevent that worldwide financial crisis from getting worse. And if prices fall, and the 2008 and 2009 books of mortgage business - the mortgages written in 2008 and 2009 - go bad, we've added another couple of trillion dollars to the world's financial problems.

SIEGEL: Karl Case, co-founder of the Standard & Poor's Case-Shiller Housing Price Index and professor of economics at Wellesley College. Thanks a lot for talking with us.

Dr. CASE: A pleasure to be here, Robert. Transcript provided by NPR, Copyright NPR.

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