Q&A: Economist Mark Zandi
Mark Zandi, chief economist of Moody’s Economy.com, is a frequent housing-market commentator. Now he has a new book out -- Financial Shock: A 360 Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis.
Seems an opportune time for a Q&A -- not just about the book, but also about his views on local home prices, his advice for homeowners and his take on the ripple effects of BRAC.
Q. So -- what can we do to avoid the next financial crisis?
Zandi: “Well, we’re doing some of those things already. For example, the Federal Reserve has ... implemented new regulations guiding mortgage lenders with respect to what kind of mortgage loans they can make going forward. ... They have to make sure that the loan … they’re providing to the borrower is affordable to the borrower. Before, that wasn’t really a criteria for making the loan, and now it is. Another thing that’s happened is we’ve gotten a housing bill, which includes a number of things, one of which is a mortgage write-down plan, which should help a few hundred thousand homeowners who are struggling hold on to their homes.
“But what’s so novel about the plan is, it’s the first attempt to facilitate loan modifications that entail a reduction in the amount of mortgage debt owed by homeowners. Before this, there was really no effort to do this. And I think this is really vital. This kind of a write-down plan is very important because there are now close to 10 million homeowners that are underwater, meaning they owe more than the value of their home. To give you context, there are 51.5 million homeowners with first mortgages. So already, closing in on 20 percent of homeowners that are underwater. … That is a large pool of homeowners that are at significant risk of default.”
Zandi: “We’ve got to invest in financial literacy. I think a very substantive cause of our current problem is many homeowners don’t have a basic understanding of their finances. They got mortgages that they did not understand. And I think that goes to some significant limitations of our K through 12 educational system. I know when I went through high school, by the time I got out, I knew how to make an omelette … but I had no idea how to balance a checkbook or what a CD was or even what the stock market was all about. I had to learn that afterwards. That’s something we should really rethink.”
Q: What can the average person do about the housing-market travails?
Zandi: “If you don’t have a problem with your mortgage, if you’re still making your payments and you’re current on your mortgage, I think it’s just a matter of waiting -- to sit tight. The market will find a bottom and it will recover and prices will begin rising. … By the turn of the decade, the market will right itself. You need to look through all of this and not panic. If your horizon is more than a few years, you’ll be fine. For those folks that are having problems with their mortgage now, the worst thing to do is nothing. There are many options now, and you should avail yourself of all of them."
(An aside to Wonk readers -- here's a How-to post with foreclosure-help information.)
Q. What's your prediction for housing-market turnaround?
Zandi: “I think prices nationwide will continue to decline through next spring. They’ll be flat for a year after that, and by 2010, the spring 2010 selling season, I think prices will start to rise. By 2011 in most communities, this will just be a distant, bad memory.”
Q. You expect big price drops, though. When do you think home prices will return to their pre-slump peak?
Zandi: “It’s going to be somewhere near 2014, 2015 nationwide. Prices, when it’s all said and done, will fall about 25 percent from the peak. Say you get 4 or 5 percent per annum growth -- so it really won’t be until 2014 until many communities start seeing a return to the previous peak.”
Q. What about the Baltimore area?
Zandi: “Baltimore’s been a bit of an enigma. I keep thinking that it should be comparable to the national housing downturn, and I still think that will be the case when it’s all said and done. It just seems to have entered into the downturn more slowly and prices haven’t fallen as far as I anticipated. … The market is not good, but it’s not quite as bad as I expected at this point. But of course, the story’s still being written.”
Q. What do you think explains that difference?
Zandi: “I think the economy may be holding up a little bit better, meaning the job market. A lot of that may be related to health care, educational services; those are industries that are holding tough, still adding jobs, and I think that’s providing a floor to the job market and to housing demand. I just think some of the excesses that are plaguing California, Florida and even Northern Virginia are not quite as significant. There’s been subprime lending but not quite as much, there’s been overbuilding but not quite as much, there’s been speculation but just not quite as much.”
Q. What impact do you expect from the thousands of jobs that are slated to come here as part of the base realignment and closure process?
Zandi: “It’s helpful. But Baltimore is a big economy. Even something as big as this is relatively small in the context of the size of the economy and the housing market that we’re talking about. The most important thing for housing is affordability. So prices have to fall, ultimately, to be consistent with incomes and rents; otherwise, the market will never really find its grove. It may be the case that prices don’t fall as much as we’ve anticipated because of [BRAC], ... but fundamentally, prices have to be low enough that enough people can afford to buy the home. And so far, that affordability is still elusive.”
Q. Tell us about your book.
Zandi: “It’s a description of how we got into this financial predicament, the role that all the different parties involved in the crisis played and their contribution to the mess that we’re in, and also ... the link between what’s happened in the housing, mortgage markets and financial system and the broader economy, and the now recession-like conditions that we’re suffering. And then finally it talks about policy and policymakers, how they responded to all of this, what kind of role they played, and what we can do going forward to make sure we don’t suffer the same kinds of problems.”