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Feldstein: Home Prices May Fall Again Without Aid

Wednesday, 06 Oct 2010 08:00 AM

U.S. home prices may fall again unless the government provides new aid that would enable owners to refinance mortgages, Harvard University economics professor Martin Feldstein said.

“The danger is house prices are going to start falling again because of the end of the first-time homebuyer credit,” Feldstein said in a Bloomberg Television interview. “That fall in house prices,” coupled with a lack of equity in homes, “could lead to a big increase in defaults and foreclosures, putting more homes on the market driving prices down.”

A government tax credit of as much as $8,000 gave housing a temporary lift in late 2009 and early this year and helped stop a fall in property values. A new housing program would need to focus on reducing the principal in mortgages, allowing refinancing of mortgages whose values exceed what the homes would sell for, said Feldstein, chairman of the White House Council of Economic Advisers during the Reagan administration.

The S&P/Case-Shiller index of property values increased 3.2 percent from July 2009, the smallest year-over-year gain since March, the group said Sept. 28.

Feldstein, a member of President Barack Obama’s Economic Recovery Advisory Board, told Obama yesterday that extending income tax cuts for two years would stimulate demand and boost the recovery. He is a former president of the National Bureau of Economic Research and a member of the NBER committee that last month declared the worst U.S. recession since the Great Depression ended in June 2009.

“It would be a mistake to raise any taxes at the current time,” Feldstein said. “The economy is very weak.”

Obama wants to extend the tax cuts passed under President George W. Bush for American households earning less than $250,000 and individuals earning up to $200,000. The cuts would be allowed to lapse on Dec. 31 for those earning more.

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U.S. home prices may fall again unless the government provides new aid that would enable owners to refinance mortgages, Harvard University economics professor Martin Feldstein said. The danger is house prices are going to start falling again because of the end of the...
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