In a new report, Roosevelt Institute Senior Fellow Mike Konczal looks at several theories that attempt to explain the relationship between the weak housing market and the sluggish economy, and comes to the conclusion that mortgage debt (and not some structural factor) is one of the major factors holding back the recovery:
– The most recent empirical evidence, from academic quarters to the IMF, shows that underwater mortgage debt is creating a drag on the economic recovery. The recovery is weaker in places where mortgage debt is the highest, as more mortgage debt results in lower consumption and higher unemployment.
– Other explanations of the relationship between the housing crash and the weak economy, such as structural unemployment created by the house bubble, contain serious weaknesses.
– Debt writedowns, foreclosure mitigation, and other housing sector specific policies are a crucial tools in dealing with this “balance-sheet recession” and gettng the economy started again.
– Foreclosures exacerbate these problems by creating vicious cycles of destructive economic activity. Some estimate that foreclosures have caused an additional 25 percent of the decline in economic activity.
As this chart shows, the areas with the largest percentage of underwater mortgages have the highest unemployment rates:
A recent study from the Amherst Securities Group found that reducing mortgage debt is the most effective strategy for preventing foreclosures. Iceland, in fact, effectively used mortgage debt forgiveness to boost its economy. A bipartisan bill introduced this month by Reps. Gary Peters (D-MI), John Campbell (R-CA), and Keith Ellison (D-MN) would mandate debt reduction on government held mortgages.