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Housing Guru in Lowell Talk: 'Demand Has Been Turned Off'

Karl Case, former Wellesley College professor of economics, speaks on the housing crisis during a luncheon at the UMass Lowell Inn & Conference yesterday.

Karl Case, former Wellesley College professor of economics, speaks on the housing crisis during a luncheon at the UMass Lowell Inn & Conference yesterday.

Lowell Sun
10/04/2011
By Dan O'Brien

LOWELL -- When Karl "Chip" Case realized the house he bought in suburban Boston for $56,000 in 1976 had appreciated to more than $200,000 less than 10 years later, it piqued his interest. 

"I had made more money just living in my house than I had as a teacher," the now-retired professor of economics at Wellesley College said during a speech yesterday at the UMass Lowell Inn & Conference Center. 

Case went on to write a paper on regional home prices for the Federal Reserve Bank of Boston, concluding that, among other things, the action of the previous decade wasn't sustainable. 

He was soon introduced to Robert Schiller ("We basically got married," Case joked), an economics professor at Yale University and an expert on  asset "bubbles." 
Bubbles, Case explained, are "when you believe assets prices will rise, and then, in fact, they do," at least for awhile. 

It's a term that has become increasingly mainstream during the last 15 years, as both the stock and housing markets rose sharply before dropping even more quickly. 

The S&P/Case-Schiller National Home Price Index is considered by many to be the authority of national housing prices. The series of indices is calculated from data on repeat sales of single-family homes of "constant-quality," or those not enhanced or significantly deteriorated over the course of their existence. 

The index has elevated the two professors' fame. Case has written five books and will testify Thursday before the U.S. Senate Finance Committee on how to stem the housing market's current five-year collapse. 
He told yesterday's audience of about 100 that he didn't like many of the ideas he was hearing in advance from senators. 

"Things like privatizing Fannie (Mae) and Freddie (Mac), or eliminating or softening the mortgage-interest tax deduction (to shore up the budget deficit) will put the economy back in the tank," Case said, adding that interest rates would rise, perhaps sharply. 

"We need some kind of expansion of fiscal policy -- not too much, because we can't let debt get too much higher," he added. "But I'd rather do nothing than what I've been hearing. Austerity today will mean a smaller economy." 

Through a rapid series of charts flashed upon each side of his podium, Case explained the origins of the housing boom during the early part of the last decade. One key component he said doesn't get a lot of airplay: Y2K. 

"The fear that everything would shut down essentially meant demand from 2001 and 2002 was spent in 1999," Case said in reference to fears that computers would freeze at the dawn of the new millennium because they weren't programmed for the changeover from 1999 to 2000. 

The predictable slackening of economic demand shortly afterward (exasperated by the terror attacks in September 2001) led the Federal Reserve, led by then-Chairman Alan Greenspan, to aggressively lower interest rates to get the economy moving again. Mortgage rates followed suit. 

"When Treasury rates went from 6 percent to 2 percent in the blink of a eyelash, that set in motion an incredible financing boom," Case said. 

In 2003, more than 15 million mortgages were refinanced, according to the federal office of Housing and Urban Development. Only three years earlier, it was just over 2 million. Nearly one-third of the nation's entire outstanding mortgage debt in 2003 came from refinancings. 

The national housing market arguably peaked in January 2006, when housing starts were on pace to total 2.37 million annually. To that point, they normally ran at annual rates of from 1 million to 2 million. 

"Then the shoes came off," Case said, adding that the "big flaw" was that people were led to believe that "you couldn't lose" with housing because the value of collateral (the home itself) was rising, as it had for 40 years. 

More recently, housing starts have been chugging along at an S&P/Case-Schiller National Home Price Index historic low of about 500,000 annually. 

Case also noted that in six short years (2000 to 2006), the total value of owner-occupied housing rose from $12.1 trillion to $22.9 trillion. But in the next four years, it declined to $16.5 trillion. 

"Demand has been turned off," said Case, who has written five books. "Household formation has frozen -- people are staying home with Mom and Dad or they're doubling up." 

And yet on a day when the Dow Jones industrial averages sank another 250 points, and bond-fund king Bill Gross predicted an increased risk of global recession, housing expert Case insists he's "an optimist." 

He conceded, however, that it's getting harder to maintain that optimism. 

"We've lost using the housing market as part of monetary policy," he said. "There's been a complete shutdown." 

Yesterday's talk was the first of three "Lunchtime Lectures at the Inn & Conference Center." The series is co-sponsored and presented by The Parker Lectures Committee, UMass Lowell Center for the Arts and Ideas, Middlesex Community College, the Cultural Organization of Lowell, and Professor Bill Mass of the UMass Lowell Center for Industrial Competitiveness.