Economists seek solutions, signs of life in housing

By Ros Krasny

SAN FRANCISCO (Reuters) - Top economists at the Allied Social Sciences Association's annual meeting have been searching -- in some cases, in vain -- for signs of life in the U.S. housing market, a key element for busting the country out of a deep economic downturn.

Karl Case, economics professor at Wellesley College and co-creator of the Case-Shiller housing price index, said it was hard to predict when housing prices would finally hit bottom.

"People who say, 'Oh, the bottom is coming in February,' are in la-la land," Case said during a panel on housing in the macro economy at the ASSA meeting in San Francisco.

But he also said there are a few signs of life.

Some of the biggest potential overshooting in home prices on the way down is in states such as Arizona and Florida, areas where major overbuilding took place during the boom. "Where this glut is occurring is fortunately in places where people still want to go," Case said.

Case told Reuters that two other elements in the current data provided some hope of a market turnaround.

"People are showing up at the (foreclosure) auction sales and buying. The price declines are starting to gather in buyers," he said. "And a fair number of people are prepared to lower the price on their house until it's sold."

That capitulation effect, breaking through the phenomenon of "downward stickiness" on housing prices, started to show up more markedly in 2008, Case and collaborator Robert Schiller, a Yale economics professor, said in a paper presented at the conference.

But Richard Curtin, an economist at the University of Michigan, was less hopeful of a fast rebound.

"We don't see any hint of a turnaround in housing markets in the next nine months to a year," said Curtin, director of the University's closely-followed consumer sentiment survey.

A trio of factors continue to dog housing, according to Curtin: Americans' suspicion that home prices will continue to fall; higher credit standards now being applied to mortgage applications; and uncertainty about future income as layoffs run rampant and the jobless rate continues to rise.

Curtin said research by the University of Michigan supported the link between easy credit and this decade's housing boom.

At the peak of the housing market in 1977, a majority of home buyers, or 52 percent, said their main motivation was the idea that house prices would rise. By 2005, 75 percent said that easy credit was the key motivation.

"The boom couldn't have occurred without granting mortgages to anyone," Curtin said. "The 1970s was a pure price bubble; the 2000s was a pure credit bubble."

BUY YOUR OWN MORTGAGE?

Economists continue to search for ways to stem the tide of foreclosures that continues to subsume the U.S. economy, or to prevent similar problems in the future.

Federal Reserve Board economists Wayne Passmore and Diana Hancock discussed their plan to create an "option" at the time of a home purchase allowing home buyers to buy back their mortgage at market value if prices dropped.

The proposal was initially aired at a UCLA-Berkeley housing symposium in late October.

Under the plan, a mortgage could be paid off at the house's market value, not at the higher mortgage value: the homeowner would have to leave the house to exercise the option.