Kenneth Rosen: Housing Will Bottom Out This Year

The Berkeley professor is more optimistic about housing than many.


While many economists don't see housing hitting bottom until 2010, Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California-Berkeley, expects the market to stabilize sooner. In a recent interview with U.S. News, Rosen explained why he's optimistic about a real estate rebound, identified where the Bush administration's housing-crisis response fell short, and argued that Americans should stop looking at their homes as investments. Excerpts:

What's your outlook for the housing market in 2009?

I think that [housing prices] will be down a little bit more this year, another 5 or 6 percent nationally. So the cumulative decline from the peak—which was late 2005 or early 2006—will be about 22 percent. We expect this year to be less of a decline than last year. Now we still have prices declining, but it is going to be a slower rate of descent. And I think 2009 will be the bottom year for the housing market. That seems pretty optimistic.

That's true. Everyone else is talking about another big decline this year, but let me give you a reasoning [behind my forecast.] The negative side is, of course, we have these foreclosures hitting the marketplace, and, of course, we have lots of job losses. And those are big negatives—no question about it. On the positive side, we have the lowest interest rates we've seen in a long time. And for someone who can get credit—and put down 20 percent—a fixed-rate mortgage is quite low. And then the last thing, which is what we are counting on, is that there is going to be a big policy initiative coming out of the new administration that is going to try its best to put more demand in the marketplace and stabilize the foreclosure problem. And we are thinking that those are going to be partly successful. What's your take on the Bush administration's response to the housing crisis?

They've dropped the ball. They didn't identify the problem early enough. They thought it was a small problem. What they have done is not wrong, but they just have been way too slow. What we need is a housing and mortgage czar. Someone whose only job is determining "How do we get people to buy houses? How do I solve the foreclosure issue? How do we get Fannie Mae and Freddie Mac underwriting correctly?" How can we ensure that something like this doesn't happen again?

The No. 1 thing is to reform the housing finance system so we have suitability requirements for households borrowing money. For example, guidelines that ensure borrowers don't spend more than a certain fraction of their income—say, 35 percent—on housing, that you don't have exploding-rate mortgages, that you really qualify the person that he or she does have the income, that you appraise the house instead of having a computer tell you what it is worth. Good lending standards, which we have had for much of our history, need to be repositioned in the housing market. What is the biggest lesson for consumers about the housing crisis?

Being a homeowner is a great thing, but many people shouldn't be homeowners—they should be renters. We all think it's the gravy train, but house prices go up, and they go down. They go up by a little bit more than the rate of inflation over the long run. Housing is not an investment. It is a consumption good with good investment characteristics over the long run. But people shouldn't think of [a home] as a short-run investment.