Good morning Chairman Baucus, Ranking Member Grassley and members of the committee. My name is David Seiders and I am the chief economist for the National Association of Home Builders. Thank you for the opportunity to testify today on the current condition of the housing market and on policy options to strengthen the economy through the housing sector.
 

New home sales and single family housing starts already are down by more than 50% from recent peaks and the month’s supply of new homes for sale is up to nearly 10 months with serious downside implications for future housing production.

This dramatic housing contraction has exacted a heavy toll on economic growth and employment during the past two years and has pushed the economy to the brink of recession. In addition to the sharp declines in home sales and housing production, we’re also seeing falling home prices and serious declines in mortgage credit quality.

These factors have taken a toll on household wealth and provoked a surge in mortgage foreclosures, a substantial decline in homeownership and serious damage to financial institutions holding mortgage assets.

The pronounced decline in mortgage credit quality first became evident in the subprime mortgage sector last year and resulted in serious damage to major components of U.S. mortgage securities markets. Furthermore, bank lending standards for all types of conventional home mortgage loans have tightened substantially since last summer.

These forces have combined to create a bona fide credit crunch in the housing sector. [return to top]
 

These actions definitely have improved the functioning of short-term money markets; however, it is important to note that rate cuts by the Fed do not necessarily translate into lower mortgage interest rates. Long-term rates include an inflation component and if market expectations of inflation rise as the Fed eases monetary policy, then little or no benefit will be transmitted to mortgage rates.

This problem highlights the importance of Congressional action with respect to fiscal policy in the current environment.

The recently enacted Economic Stimulus Act of 2008 may keep the economy out of recession this year, or at least limit the severity of recession, and NAHB applauds the work of the Congress on this bill.

However, this short-term stimulus package does not address the deep problems posed by the housing contraction that’s at the root of today’s economic and financial market problems.

Some argue that the best way to bring the housing market back into balance is to permit housing prices to fall quickly over a short period of time. However, this would most likely cause further substantial damage to the economy, to financial markets and to America’s home owners. [return to top]
 

With respect to options, NAHB has the following tax policy recommendations for the committee:

• First, create a tax credit for the purchase of a home.
  
  Consumer interest in home buying appears to be perking up a bit as affordability measures improve, although home sales still are deteriorating. A temporary tax credit for home buyers could quickly energize the markets, reduce the record overhang of vacant housing units, stabilize house prices and halt the destructive decline of mortgage credit quality.
  
  
• Our second recommendation is to expand the Mortgage Revenue Bond program.
  
  This program offers a method of increasing housing demand and responding to foreclosure concerns. A special allocation of bonds to be used for either purchase or refinancing would be beneficial for housing and the economy.
  
  Expanding the reach of the MRB program would be particularly helpful for communities facing waves of foreclosures or heavy inventory conditions.
  
  The committee adopted this proposal during its work on the first economic stimulus bill, and we urge that it be included in any future package.
  
  
• We recommend lengthening the time frame to carry back net operating losses.
  
  A second stage of economic stimulus should also lengthen the time frame for businesses to carry back net operating losses as deductions against previously paid taxes — from two to five years.
  
  In the case of home builders, the immediate boost to financial resources would lessen the need for high-cost financing or accelerated sales of land and housing inventory onto glutted markets. Again, we appreciate the committee’s efforts in moving this provision as part of the first stimulus package.
  
  
• Finally, we recommend that housing be designated as an eligible investment for tax-preferred retirement accounts.
  
  The down payment remains the single largest hurdle for most first time home buyers, particularly considering today’s much tighter lending standards. Congress could increase capital available for downpayments by allowing them to qualify as an eligible investment for tax-favored retirement accounts. 

NAHB looks forward to working with the committee and the Congress on these and other options for addressing the crisis in housing.

Thank you for the opportunity to testify today. [return to top]