Years of soaring house prices have given way to a double-digit tumble since 2006, with no end in sight. Housing expert Daniel McMillen, an economist with the Institute of Government and Public Affairs at the University of Illinois, discusses the slumping market and when it might rebound in an interview with News Bureau Business and Law Editor Jan Dennis.
Has the nation's housing market hit bottom or could values continue a more than yearlong decline?
I don't think the housing market will bottom out until after the economy starts to recover. Until then, I think home prices will keep dropping, but how much is anyone's guess.
Prices have fallen 11.6 percent since a year ago, and 17.5 percent since the market peak in 2006. One in every five homes sold over the last year was in foreclosure, and an estimated one in six homeowners have negative equity - meaning they owe more on their mortgage than their house is worth.
That's why I don't see this changing very quickly. We have a huge inventory of unsold houses and a lot of people with negative equity, so the economy is going to have to recover quite a bit before the housing market really starts to rebound.
It could be more than a year before the economy turns around. This is a recession triggered by a panic in the financial markets, and previous experience with panic in financial markets has been fairly narrow, like Japan's problems in the 1990s.
To have a nearly worldwide failure of the financial system is something we really don't have any experience with, so it's really hard to predict how long it's going to take for the economy to recover. Eventually confidence will be restored and things will start to rebound. But it's not going to be quick.
Do you think government efforts to prop up the housing market will help?
Some will and some won't. One that I don't think will have much effect is the bigger tax credit for first-time homebuyers. We had credits before, and while they're a little bigger now, a few hundred dollars isn't going to make much difference to most people. We would need much larger increases to get people to react.
One that I think is pretty significant is pumping as much as $200 billion into Fannie Mae and Freddie Mac, allowing people to renegotiate their mortgage at current rates as long as the mortgage is less than 105 percent of the value of the home. That should ward off a lot of foreclosures, which really have a negative effect on the housing market and the economy.
After years of rapid price growth, did the housing market need a correction?
It did. But it didn't need this much of a correction. For years, economists have been debating whether house prices could continue going up as much as they were. Most thought they had to at least start to slow down. Prices really jumped from 2004 to 2007, at rates that just can't be sustained for the long term. People's incomes weren't going up that much, so it couldn't continue forever.
But even with the decline, prices are still only down to 2004 levels so it's not as though prices have simply collapsed.
Have certain areas, such as Champaign-Urbana, fared better than the nation as a whole?
Champaign-Urbana has weathered the downturn much better because it didn't have the spectacular rise beforehand. Prices here rise by 1 or 2 percent a year. They've done that for a long time and they're still doing that.
I think there are a couple of reasons. One, we have a really strong, steady economic base because of the university. We do not have a lot of people moving into the area, bidding up housing prices when times are good. And we don't have a lot of people leaving the area when times are bad. It's a steady place where the stock of houses basically matches the people who are here.
Prices can stay fairly low when new construction is relatively inexpensive, which is the case here because anytime developers want land for housing they can buy a cornfield and put up hundreds of new houses. Places prone to big price increases are areas like Boston or New York, where land is constrained and demand is high.
The Chicago area is more like the nation. They haven't seen the same price decreases as the coasts, but they've had more of a decline than the rest of Illinois.
Could the slumping housing market eventually affect schools, local governments and other taxing bodies that rely on property tax revenue?
It doesn't have much effect on what people pay in property taxes. In Illinois, units of government vote on the amount of money they want to raise - the levy - then the assessor adds up the value of all homes and out of that comes a tax rate. So if assessments go up, tax rates go down. If assessments go down, tax rates go up. In the end, you pay the same.
What is going to matter more is that state government relies heavily on sales and income taxes, which go down a lot in a recession. State government gives money back to school districts and local governments in the form of grants, so if state government is facing a $4 billion or $5 billion deficit, it's going to be really hard to give a lot of that money back. Local governments are really going to be affected by that.