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MN2020 - Home Equity Protection Plan Tried, Worked in Syracuse
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Home Equity Protection Plan Tried, Worked in Syracuse

May 07, 2009 By Lee Egerstrom, Economic Development Fellow

A similar program to MN2020's Minnesota Home Values Guarantee Program under consideration in the Minnesota Legislature was tried on a more limited scale in the city of Syracuse, N.Y., earlier in this decade.

It worked.

Now, a team of business professors and economists at Yale University's School of Management that helped Syracuse devise its plan is calling for a federal home equity insurance program along lines of what was tried at Syracuse and is under consideration in Minnesota.

Yale professor Barry Nalebuff uses a metaphor to describe the current housing, mortgage and finance market, saying, "No one wants to catch a falling knife."

People stand on the sidelines, fearing prices will fall farther, he says. This leads to lower home prices and more defaults, more distressed sales and foreclosures and the downward spiral in home prices that has toppled financial institutions and the global economy.

That also was the underlying reasoning in a Minnesota 2020 report in March, Stopping the Freefall: Stabilizing Minnesota's Housing Market (Buegler and Egerstrom), that proposed Minnesota consider a five-year pilot program guaranteeing the down payment equity for home purchases.

Bills incorporating that concept are moving through the Minnesota Legislature, chief-authored by Sen. Linda Scheid and Rep. Jim Davnie, the bill is awaiting final floor action.

The Minnesota idea grew out of the farm financial crisis of 1982-1987. Larry Buegler, president of the Farm Credit Bank of St. Paul, began a Land Values Guarantee Program that guaranteed the purchase price for up to five years on the million acres of Midwest farmland then held in bank inventory.

That set the floor under land prices, Buegler recalls. Within a year, the bank now known as AgriBank FCB sold more than 800,000 acres, farmland prices began to rise and the farm economy was on the mend.

Knowing how that played out, Buegler says the Scheid-Davnie proposal would be "an insurance policy for homebuyers." People stepping into the market to buy surplus homes under this pilot program would be assured they wouldn't lose their down payments from falling market prices.

Syracuse had home prices falling for nearly a decade when it began its housing guarantee program, called Home Equity Protection (HEP). Yale SOM faculty developed the insurance-like plan and worked with the U.S. Department of Housing and Urban Development and a nonprofit organization, Neighborhood Works, to implement and manage the program.

Like the St. Paul farmland program, the Syracuse home equity program had a near instant impact on market prices. Neither program had to pay out money but did prop up home and land values.

The HEP program is still referenced on Syracuse's city website, but while it is technically in place, it isn't being used, said Kerry Quaglia, executive director of Home HeadQuarters Inc., the Syracuse nonprofit that administered the program. Syracuse's home values collapsed before the national housing bubble burst, he said. The mere existence of the program was enough to stabilize his city's housing prices.
That pilot program was promoted by realtors between 2002 and 2006, Quaglia said, and was the assurance the market needed for a modest 1 to 2 percent annual increase in Syracuse housing prices in the past five years while the housing market collapsed elsewhere across the nation. Patrick O'Connor, a borker with CNY Homes at Syracuse, said his local market finds homes under $200,000 and above $650,000 have stabilized while homes in the mid-price range have seen modest declines.
Nalebuff and colleagues at Yale have studied the Syracuse program in a new report (see References below).

The Yale study compares the housing market at Syracuse in central New York with Buffalo, in western New York. Both are outside the economic shadows of New York City, but both are unique cities in their own right and would have micro-market characteristics.

[ this graph is no longer available - we apologize for the inconvenience ]

The different price tacks in Buffalo and Syracuse can have several explanations, Nalebuff said in an exchange of emails. "But the long-term downturn in Syracuse was very similar to what had happened in Buffalo," he said.

In the case of Syracuse, the city itself has a population of about 150,000, or smaller than the Duluth or St. Cloud metro areas. The HEP program only worked in the city proper,  not in adjacent areas, while Syracuse is actually the center of a metro area of nearly 700,000.

This makes the Syracuse program environment different than the Minnesota pilot program of several counties currently before the Legislature. And it means the Syracuse program is less likely to influence market prices beyond city limits. Nonetheless, Yale researchers see enough market response to say a federal program, possibly through Freddie Mac and Fannie Mae, is needed.

Programs like Minnesota is considering and as tried in Syracuse would be absorbed into a federal program if and when Congress and the Obama administration look for less expensive ways to stabilize housing markets and prop up financial institutions.

"Stabilizing the housing market is important not just for itself, but to turning around our economy," Nalebuff writes in an op-ed piece for publications that he shared with Minnesota 2020.


Buegler, Larry and Lee Egerstrom. "Stopping the Freefall: Stabilizing Minnesota's Housing Market." Minnesota 2020: March 2009. It can be found here.

"Home Equity Insurance: A Pilot Project." (Caplin, Goetzmann, Hangen, Nalebuff, Prentice, Rodkin, Skinner and Spiegel.) Published in Glaeser, E. and J. Quigley (eds.) Housing Markets and the Economy: Risk, Regulation, and Policy. Cambridge, Mass.: Lincoln Institute of Land Policy. 2009.

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