Residential Supply and Demand

Fed Chairman Points to Distress as Holding Housing Sector Back

Posted on Monday, July 4, 2011

The Federal Reserve says it will complete its purchases of $600 billion in Treasury securities by the end of this month as planned – a program that Fed Chairman Ben Bernanke says has succeeded in keeping mortgage interest rates low.
These low interest rates combined with the reduction in home prices endured over the last several years have made housing extremely affordable, Bernanke told reporters at a press conference following the Fed’s policy meeting Wednesday, yet the housing sector continues to be depressed and weigh heavily on the overall economy.
Bernanke says tightened credit has become “an important problem” for prospective homebuyers, but uncertainty about employment and economic recovery are affecting people’s decision to buy a house.
“I would like to see further efforts to modify loans where appropriate, and where not appropriate, to speed the process of foreclosure and disposition to clear the market and get these homes out of the pipeline,” Bernanke said.
He believes addressing the distress in the housing market will serve to boost both home prices and consumer confidence.
Bernanke points to the fact that the decline in home prices is most pronounced among distressed properties. He says data show that if you take the distress factor out, price declines are significantly narrower, and in some markets actually increasing.
“If we can reduce the current number of distressed sales, that would do a lot to stabilize the market and give people confidence that…they are not buying into a falling market,” Bernanke said.
Through the first part of this year, distressed properties had been grabbing more than a third of the market share
for home sales, upwards of 40 percent during some months. But data released earlier this week by the National Association of Realtors indicates the distressed portion of existing-home sales declined to 31 percent in May.
On the unemployment front – another major hindrance to both the housing and economic recovery – the Fed said in its monetary policy statement that “recent labor market indicators have been weaker than anticipated.”
The national unemployment rate has risen by 0.3 percent since March. Bernanke says he and his colleagues expect the rate to decline from its current 9.1 percent, but he says the decline will be “painfully slow.”
The consensus among Fed board members is that the unemployment rate will begin to head lower through the remainder of this year to hit in the range of 8.6 to 8.9 percent by the fourth quarter. They project moderate declines over the next two years, with the rate settling at 7.0 to 7.5 percent by the end of 2013.
The Fed board voted again to keep the target range for the central bank’s benchmark federal funds rate — the rate at which banks lend to one another — at 0 to 0.25 percent, a level they’ve maintained for two-and-a-half years now.
As has consistently been its mantra, the Fed said it “continues to anticipate that economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
When asked about any forthcoming changes in the statement framing the near-zero rate, Bernanke said the board is “at least two or three meetings away from taking any action, and I emphasize at least…it could be significantly longer” depending on how the economy evolves or changes.
So what’s holding the economic recovery back?
Bernanke says it’s temporary factors, in part, such as the effect of higher energy prices on consumer spending and supply chain disruptions from the tragedy in Japan. The other part, though, may be more lasting issues that mean a slower pace of growth will persist.
The Fed chief told reporters that truthfully, “we don’t have a good read on why.” He says some headwinds, such as problems in the housing sector and labor market “may be stronger than we thought.”
Nevertheless, Bernanke does expect moderate growth going forward and healthier economic gains even in the latter part of this year than seen in early 2011.
By: Carrie Bay DS NEWS

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