Fed's Duke Tells Senators Housing Recovery Not Following Script
Federal Reserve Governor Elizabeth A. Duke toldrnmembers of the Senate Committee on Banking, Housing, and Urban Affairs that “the failure of the housing market to respond to lowerrninterest rates as vigorously as it has in the past indicates that factors otherrnthan financial conditions may be restraining improvement in mortgage credit andrnhousing market conditions and thus impeding the economic recovery.”</p
Sixrnyears after house prices first started to decline and more than two years afterrnthe start of economic recovery, Duke said, the housing market remains arnsignificant drag on the U.S. economy. rnShe explained that typically as an economy turns down, households postponernpurchases of durable goods such as housing. rnBut when the upturn comes, improving economic prospects and diminishingrnuncertainty, often helped by low interest rates, usually unleash pent-uprndemand. </p
“The current economic recovery hasrnnot followed this script, in part because the problems in the housing marketrnare a cause of the downturn as well as a consequence of it,” she said. The nation has lost an aggregate of $7rntrillion in home equity. Thernextraordinary fall in national house prices has resulted in $7 trillion in lostrnhome equity, more than half of what was there in 2006. This fall in wealth has significantlyrnweakened household spending and consumer confidence. In addition, around 12 million households arernnow underwater on their mortgages and when hardships hit have been unable tornresolve mortgage payment problems by selling their homes, resulting all toornoften in foreclosure, dislocation, and personal adversity. Neighborhoods andrncommunities suffered as well from the neglect and deterioration that accompanyrnvacant properties and puts further downward pressure on house prices. </p
These problems, Duke told thernSenators, have been exacerbated by an ongoing imbalance between supply andrndemand. In recent years that supply ofrnsingle-family homes has greatly exceeded the demand in part because ofrnforeclosures which are likely to continue for quite a while. At the same time, a host of factors have beenrnweighing on demand. Families have beenrnreluctant or unable to purchase homes because of concerns about income,rnemployment, or where prices might go. Tightrnmortgage credit conditions have also been a factor. Although some retrenchment in lendingrnstandards was necessary after the lax standards that prevailed before therncrisis, current lending practices appear to be limiting or preventing lending,rneven to creditworthy households. </p
Duke referred to a paper titled The U.S. Housing Market: Current Conditions and Policy Considerations releasedrnby the Federal Reserve on January 4, 2012. rnIn the paper, she said, Federal Reserve staff discussed the benefits andrncosts of a variety of policy options that have been proposed to respond tornthese difficult housing issues, including increasing credit availability, exploringrnthe scope for further mortgage modifications including encouraging short salesrnand deeds-in-lieu of foreclosure, and expanding the options available forrnholders of foreclosed properties to dispose of their inventory responsibly. “Anyrnpolicy proposals, though, will require wrestling with difficult choices andrntradeoffs, as initiatives to benefit the housing market will likely involvernshifting some of the burden of adjustment from some parties to others.”
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