Nic Retsinas Is Housing’s Discerning Eye

In our new feature, People to Know, we profile Nicolas P. Retsinas, whose work as the director of the Joint Center for Housing Studies has predicted while cautiously interpreted the market.

If you're trying to make a living building houses, and you don't know Retsinas, it's time to change that circumstance: Nicolas P. Retsinas is a Harvard scholar, but I sure wouldn't call him an ivory tower kind of guy. For the housing industry, he's more like a prophet crying in the wilderness.

For example, in an op-ed piece he wrote for the Boston Globe last October, Retsinas pointed out that before the subprime mortgage market crashed, it operated “outside the corral” of federal banking regulations, to the detriment of all. Some observers charged that federal government policies aimed at increasing the home ownership rate created what Retsinas called this “Wild West market.” But that's wrong, he contended.

In 2004, the U.S. home ownership rate in the rose to an all-time high of 69 percent, Retsinas noted, but the subprime market did not even blossom until 2005. Retsinas credited a robust economy, low unemployment, low interest rates, credit scoring and banks complying with the Community Reinvestment Act Of 1977 for the bump in home ownership — while only 9 percent of subprime borrowers used such loans to finance first-time home ownership. The subprime market actually was used mostly by investors flipping houses, and move-ups riding a bull market to live beyond their means, Retsinas charged.

Ironically, as subprime lending soared — and fueled housing bubbles in many markets — home ownership actually fell, as low income and minority households were priced out of the market.

There is a role for government in housing financing, Retsinas says. Click here to listen.

Retsinas long ago identified the source of the financial crisis and our current recession as a broken housing finance system. “When you talk about the problems in housing, you are — de facto — talking about housing finance,” he says now. While he doubts the industry will find the bottom of this cycle before 2011 in most markets, Retsinas sees a silver lining in the clouds.

“The long-term projection argues for fairly strong housing demand,” he says. “Aging baby boomers are generally healthier and wealthier than past generations. The echo boom is coming along, and we still have a growing population augmented by immigration, although that's slowing some now because of the short-term economic outlook.

“We just have to get through the current situation, and the most significant factor in all of that is the loss of confidence in the housing market,” Retsinas says. “The good news is there's now a strong consensus that the government must find ways of intervening. We will have more stimulus packages, which is a radical change from a year ago, when the government response to a deepening crisis was to encourage voluntary loan modification.

“That's fairly weak engagement, but the level of government engagement now is supercharged,” Retsinas says. “And I don't think it's over yet. How do we make sure we don't have major job losses? History is abundantly clear that when people lose jobs, that's the worst thing that can happen for the housing market.”

"I think in the coming year we're going to have a very, very healthy and overdue debate on what kind of housing financing system we want." —Nicolas P. Retsinas Click here to listen.

He argues that the strongest pent-up demand is in the entry-level market. “It's right to focus the stimulus program on first-time buyers,” he says. “Whether we talk about immigrants or echo boomers, the strength of the demographics is at the low end of the pricing spectrum. And of course, entry-level buyers don't have houses to sell. But when the housing finance system re-introduces very high down payments, that creates another barrier to those buyers. The good news is that policy makers now seem to agree that the next stimulus package must have provisions that directly affect the housing market.”

But Retsinas warns against any stimulus that would immediately ramp up housing construction. “That's why first-time buyers should be the target, because they will buy existing homes and help us get that inventory down.”

“It would be very difficult for home building to lead recovery,” Retsinas says, “because the housing finance system is broken, and that's the lifeblood of the housing market. But we do have some tools available to us. For instance, the government now controls the GSEs. It can now intervene more directly to use them to achieve public policy objectives. And I'm encouraged that people are now, at last, talking about fixing the housing market rather than just banks. Housing is where this has to begin.”

Retsinas believes Congress and the nation will engage in a healthy debate throughout 2009 over what kind of housing finance system the country should have. “What will be the role of government?” he asks. “What form will Freddie Mac and Fannie Mae take? Will they even exist? What's the role of FHA?”

The country must learn from what happened, Retsinas says. “It was only four years ago that FHA was only about 3 percent of the mortgage market. This past year, it was 17 percent, and 25 percent of new home sales — and even higher in the first-time buyer segment.”

The prospects for housing improved again recently when Nicolas Retsinas was tapped by President-Elect Obama to be part of his transition team. Retsinas is no stranger to Washington, D.C. During the 1990s, Retsinas served in the Clinton Administration as assistant secretary for Housing-Federal Housing Commissioner at the U.S. Department of Housing And Urban Development and as Director of the Office of Thrift Supervision. He also served on the board of the Federal Deposit Insurance Corp.

Wherever he is, Nic Retsinas knows what housing needs to break out of the box that constrains it today, and he won't be shy about sharing those ideas.