ROBERT SIEGEL, Host:
Professor Bill Wheaton is an economist at MIT and director of research of the Center for Real Estate there. Welcome back to the program, Bill Wheaton.
BILL WHEATON: Thank you very much, Robert.
SIEGEL: And first, what's the most significant thing that you've heard in the Bernanke speech today?
WHEATON: I think it was probably the speech itself. The Federal Reserve chairman has a history of coming out in front of issues just before we get news that's a little worst than we thought. So I wouldn't be at all surprised if in the next week we all find out something that in fact the chairman knew yesterday.
SIEGEL: You mean, the fact of the speech is a leading indicator of some bad news?
WHEATON: Exactly. Exactly.
SIEGEL: When he looked ahead at issues facing the housing market, whether it's defaults or housing prices, he wasn't very optimistic. What's your sense of what lies ahead in housing?
WHEATON: I think housing looks just terrible right now. We actually have about half of the residential investment that we did in 2006, that's construction and homebuilding. And I actually think that it's going to fall further, you know, because we think that prices are going to continue to fall, perhaps, all the way through 2010. So housing itself looks really quite bleak. I think the question was on the chairman's mind as whether or not that's going to spill over to the rest of the economy.
SIEGEL: If the stigma of housing, for a moment, if prices really do fall a good deal, many Americans fall into a negative equity situation where they actually owe more on a house than what it can actually fetch in the market.
WHEATON: That's true. And what we're finding now is that a growing number of foreclosures are not the result of people not being able to afford their monthly mortgage payment, for example, but it's because they have negative equity. And they say, why should I continue to pay off a loan that's, you know, worth 20 or 30 percent more than my house is. I'll just turn the house back to the bank and rent for a few years. So it's sort of a voluntary default.
SIEGEL: Are you, at all, hopeful that some of the remedies that have been talked up - whether it's the Bush administration's Hope Now program or trying to get banks to do workouts on loans with people - that this might, in some way, limit the number of foreclosures and keep people in their homes and maybe keep prices from falling still further?
WHEATON: Well, it's certainly true that if you lower the federal funds rate, you do help a certain number of adjustable rate mortgage contracts. But many of those contracts, for example, are actually pegged to liable rates which are not very sensitive to what the U.S. Fed does. So it's - I mean, it certainly won't hurt and it will help a little bit. But there's still a huge number of potential foreclosures looming which really don't auger well for house prices.
SIEGEL: I wanted to ask you about an observation that the Fed chairman made in his speech, which I find interesting. He said that at some level, the magnitude of the reaction, the economic reaction worldwide, to the subprime problems here might be deemed surprising given the small size of the U.S. subprime market relative to world financial markets, which does make a lot of sense. There are only so many mortgages, and there seems to be an awful lot of reaction to the problems with them.
WHEATON: I think that's a view that many economists around the world have. That magnitude of the subprime market, of its loses, looks absolutely tiny by world markets. And what happened is, what macro economists call a financial contagion. And it's really pretty emotional as far as we can tell, which is lenders of other kinds of financial instruments - corporate loans, other kinds of loans, begin to look over their shoulder and say, oh, gee, did we do any of the strange things that the subprime mortgage market did.
And so there's a period of a lot of uncertainty as everybody sort of checks on, looks behind their shoulder to see if, in fact, they did some of the strange things that the subprime market did.
SIEGEL: And you think we're still in that?
WHEATON: We just don't think that they actually did.
SIEGEL: You think we're still in that phase now, everyone trying to figure out what they did?
WHEATON: Yes, yes.
SIEGEL: Really?
WHEATON: I think there are still a lot, of sort, of emotion in other parts of that, yes, of the financial markets.
SIEGEL: Well, Bill Wheaton, thanks a lot for talking with us once again.
WHEATON: My pleasure.
SIEGEL: Professor Bill Wheaton, an economist at MIT and director of the research at MIT Center for Real Estate.