Comment on Eberly and Krishnamurthy: Efficient Credit Policies in a Housing Debt Crisis
Comment on:
:
Efficient Credit Policies in a Housing Debt Crisis:
Very nicely done by the very sharp Janice Eberly and Arvind Krishnamurthy, yet after reading it I am more mystified than I was before. I am more mystified that conforming-refinancing loans with equity kickers were not offered to all underwater and above-water homeowners alike. I am mystified that, instead, the debt overhang was removed via foreclosures and some case-by-case renegotiations. It was brutal, as discussant Paul Willen had acknowledged, and it is not clear that it is over yet. Even though during the housing bubble a million single-family homes above trend were being built each year, since 2007 the annual total has dropped to half a million, far below the long-run trend of 1.2 million.
Now the country is 4 million single-family homes short based on pre-housing-bubble trends. That translates into 4 million families living in makeshift situations–primarly their relatives’ basements and attics. Yet, strangely, this enormous overhang is not exerting any pressure for a single-family housing construction recovery.
It is clear that both these potential homeowners and the lenders are unwilling to take on the types of risk they routinely took before 2008. The single-family housing credit channel has not been restored to its old status. Is this a good finance pattern? Was the previous pattern a poor idea in the first place? Or is the country now incurring enormous societal welfare losses due to the Obama administration’s failure to use its administrative powers to fix the housing-finance credit channel?