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Home Publications Blogs Beat the Press The FHA Has Played a Positive Role in the Housing Market, but Let's Not Overdo It

The FHA Has Played a Positive Role in the Housing Market, but Let's Not Overdo It

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Tuesday, 17 December 2013 06:11

My friend and co-author Jared Bernstein used his NYT blogpost to defend the Federal Housing Authority (FHA). I am mostly sympathetic to his case. The FHA has played a positive role in the recovery, helping to support the housing market when private funding had largely disappeared. However, I was struck by his reference to a study by Moody's Analytics which purportedly finds that house prices would have fallen by another 25 percent had the FHA not been there to support the market.

I didn't actually find the Moody's study on the FHA, but Jared did link to a paper from the Center for American Progress (CAP), which has the following paragraph:

"It’s difficult to quantify the agency’s exact contribution to our economy in recent years. But when Moody’s Analytics studied the topic in the fall of 2010, the results were staggering. According to preliminary estimates, if the Federal Housing Administration had simply stopped doing business in October 2010, by the end of 2011 mortgage interest rates would have more than doubled; new housing construction would have plunged by more than 60 percent; new and existing home sales would have dropped by more than a third; and home prices would have fallen another 25 percent below the already-low numbers seen at this point in the crisis."

It is difficult to envision this story. Mortgage interest rates would have doubled without the FHA? Let's see, the FHA was an important source of demand for mortgages. So we eliminate a big source of demand and then mortgage interest rates double? I wonder what economic theory they are using over at Moody's. (Anyone relying on Moody's for an assessment of the housing market should remember that it completely missed the collapse of the housing bubble.)

In the same vein, how do we get a 25 percent further drop in house prices? There were already investors entering the market in large numbers by the end of 2010 with private equity and hedge funds starting to buy up large amounts of housing. If they knew the FHA was leaving the market, is there some reason to believe that they would not have taken advantage of an even greater buying opportunity?

Perhaps Moody's modeled a surprise disappearance of the FHA from the housing market, where Congress just votes to end its existence at the end of the month. Perhaps we would then see a sharp fallofff in house prices, but it wouldn't take too long for investors to come in and take advantage of the lower prices. A 25 percent drop in house prices that lasts for 3-4 months would be unfortunate for the people who had to sell in that period, but would not have much impact on the economy.

I think on the whole the FHA has been a net positive for the market and helped many low and moderate income families buy houses. In fact, it is to the FHA's great credit that it became virtually irrelevant during the peak housing bubble years. It could not compete with the lax standards offered by subprime lenders. But it is better to make an honest case for the agency, not try silly hype of the sort coming from Moody's and the CAP report.

 

Typo corrected -- thanks Mark Brucker.

Comments (6)Add Comment
...
written by Last Mover, December 17, 2013 7:16
Perhaps Moody's modeled a surprise disappearance of the FHA from the housing market, where Congress just votes to end its existence at the end of the month. Perhaps we would then see a sharp fallofff in house prices, but it wouldn't take too long for investors to come in and take advantage of the lower prices. A 25 percent drop in house prices that last for 3-4 months would be unfortunate for the people who had to sell in that period, but would not have much impact on the economy.


It appears Moody's wants a second housing bubble to pop so economic predators can blame it on the government. Again.

As predators swoop in to exploit the carnage left behind from the first burst bubble - since original and potential homeowners have no money left to take advantage of falling house prices - let them fall further says Moody's, without government interference from FHA.

Surely this will bring recovery to the economy from more spending by the wealth effect as housing wealth is shifted to the predators.

Then Moody's can rate America as investment grade once again.
Moody?
written by Squeezed Turnip, December 17, 2013 7:43
It just goes to show that 'tis better to have grounded analysis than moody analysis.
FHA's Irrelevance in Housing Boom
written by Richard Genz, December 17, 2013 12:14
I agree with your comment that FHA's tiny market share in the mad mortgage market of the 00's reflects very well on the agency.

The government could have designated FHA as prime mover in the homeownership campaign Bill Clinton started. We could have avoided the chaos of all those corrupt "public-private partnerships" with deregulated lenders, and eventually with Fannie-Freddie too. Those guys put on their do-gooder halos and ran with 'em, setting back the cause of building equity for low-income household for years with reckless lending products.

FHA's performance exposed the fallacy that government just can't do anything right, that we should trust for-profit players to achieve complex policy goals like homeownership for low-income families.
Suggested correction...
written by Mark Brucker, December 17, 2013 2:51
I think on the whole the FHA has been a net positive for the market and helped many low and moderate income families buy houses. In fact, it is to the FHA's great credit that IT???? became virtually irrelevant during the peak housing bubble years. It could not compete with the lax standards offered by subprime lenders. But it is better to make an honest case for the agency, not try silly hype of the sort coming from Moody's and the CAP report.
A fake Moody's Analytics cite?
written by Jay Weiser, December 18, 2013 9:19
I suspect that Dean wasn't able to find the Moody's Analytics "study" because it doesn't exist. A search in Google Scholar and Google for
A fake Moody's Analytics cite? (reposted)
written by Jay Weiser, December 18, 2013 9:25
I suspect that Dean wasn't able to find the Moody's Analytics "study" because it doesn't exist. A search in Google Scholar and Google for site:economy.com moody's analytics fha housing prices limited to 2010 turns up nothing.

The closest thing is a 2011 Washington Post column by Moody's Analytics' Mark Zandi making the more defensible argument, "The FHA stepped into this breach. The volume of loans backed by the agency has more
than tripled during the past four years, to over $1 trillion. Without this rapid expansion in FHA lending, a credit crunch would have wiped out the housing market. As it is, U.S. home prices have fallen by more than a third; without the FHA, the decline would have been substantially worse. " https://www.economy.com/mark-zandi/documents/2011-12-15-FHA-role-may-be-bloated.pdf

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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