News Flash: Housing is Important to Economic Recovery

Federal Reserve speaks up on the housing market

Consumer Confidence + Tight Credit + Too Much Empty Property = Slow Recovery

Last week the Fed sent a housing “white paper” to Congress discussing the importance of housing to the economic recovery. On Friday, Federal Reserve Governer Elizabeth Duke observed that “housing demand and homebuilding continue to be restrained by weak income and sentiment, tight lending standards, and a large overhang of vacant properties.”

Unemployment Improvement in Fits and Starts

Duke said she sees unemployment trending down and for inflation to settle to levels that are consistent with the Fed’s mandate. Unemployment does seem to be dropping: December’s jobless rate of 8.5 percent was the lowest it’s been in almost two years.

Housing Recovery is Critical to Economic Recovery

Duke also noted that, typically, the housing sector plays an important role in propelling economic recoveries — and that so far, the housing sector has not only contributed to the recovery, but the combination of substantially decreased home values and the hit on consumer confidence has not only slowed consumer spending, it has pushed a substantial number of homeowners underwater on their mortgages.

More Aggressive Government Support May Be the Answer

Both the white paper sent to Congress and Duke’s comments on Friday included suggestions that more aggressive policies and action from the government may be required to boost the housing market and spur economic recovery. According to Duke,

“policymakers should at least consider policies that take into account the role the GSEs [government-sponsored enterprises] could play in hastening the healing of the housing market rather than focusing entirely on minimizing losses to the GSEs. In the end, breaking the current logjam created by large numbers of loans severely past due or in foreclosure and high levels of distressed sales should help reduce losses to the GSEs by breaking the downward cycle in prices. And, I think it is plausible that a faster recovery in the housing markets could speed, rather than slow, the end of GSE conservatorship,”

For more of Duke’s comments at the Virginia Bankers Association/Virginia Chamber of Commerce 2012 Financial Forecast, and perspective on the Fed’s position on the housing market and recovery:

• Economic Developments, Risks to the Outlook, and Housing Market Policies (Elizabeth Duke’s speech)
• Fed governor suggests tight underwriting is stalling recovery (Housing Wire)
• Fed’s Duke Sees ‘Choppy” U.S. Job Market Amid Gradual Recovery (Bloomberg Businessweek)
• Fed Up With the State of Housing (Wall Street Journal|Heard On The Street)