By Steven K. Beckner
CLEVELAND (MNI) – Federal Reserve Vice Chairman Janet Yellen said
Thursday that the Fed will use all of its tools to “support the
recovery” after painting a bleak picture of the housing market.
She called on banks to do more “responsible lending” to finance
would-be home buyers and to seek alternatives to foreclosure.
Yellen said the housing sector will improve as the economy
continues to grow but suggested it will take a good while in remarks
prepared for a housing summit sponsored by the Federal Reserve Bank of
Cleveland.
She linked falling home prices, weak housing demand and heavy
forclosures to the high rate of unemployment — 9.1% in May as of last
Friday’s employment report.
“Looking forward, I unfortunately can envision no quick or easy
solutions for the problems still afflicting the housing market,” she
said. “Even once it begins to take hold, recovery in the housing market
likely will be a long, drawn-out process.”
Yellen vowed that “for its part, the Federal Reserve will continue
to use its policy tools to support the economic recovery and carry out
its dual mandate to foster maximum employment in the context of price
stability.”
“As the economic recovery progresses and potential homebuyers
become more confident about the durability of the recovery, it seems
probable that more families will be willing to enter the housing
market,” she added.
Yellen prefaced those comments with a dreary catalogue of the
housing market’s woes, beginning with the prospect that home prices will
continue to fall before eventually bottoming out. She cited a survey
showing that “only 15% of homeowners expect house prices to increase
over the next year, and barely half expect house price increases over
the next five years.”
“Largely because of the fall in house prices and the sustained high
rate of unemployment, about 4-1/2% of mortgages in the United States are
currently in foreclosure, and three or more payments have been missed on
an additional 3-1/2%,” she noted.
Nor was she optimistic that the pace of foreclosures will lessen
from the 2-1/2 million initiated in 2010. She said “a similar number of
foreclosure starts are expected in 2011.”
Yellen said one factor depressing house prices is the large number
of “distressed” home sales, noting that “these sales have represented
about half of all home sales in recent months.”
She said “housing market conditions are also being hurt by the
large inventory of empty and unsold homes in the United States” —
nearly 2 million.
“Although this number is down some from the highs seen in 2008, it
is about 60% higher than the average level over the 20 years before the
2008 surge.”
“And, with the pipeline of delinquent and foreclosed homes
overflowing, the inventory of empty and unsold homes will likely stay
elevated for some time, which will maintain downward pressure on house
prices and damp construction of new homes,” she predicted.
Yellen said recovery in the housing market is also “being
restrained further by tight mortgage credit.” Although the Fed’s April
senior loan officer survey showed that commercial banks have begun to
ease standards on credit card and other consumer loans, she said “they
have not yet started to ease standards for residential mortgages, even
for those extended to borrowers in the prime market.”
She said this tight credit stance is reflected in higher credit
scores required for recent mortgage originations.
“Under these circumstances, it’s not surprising that the demand for
housing remains weak,” said Yellen.
Whatever the reasons, she said the “collapse” of the housing market
“has left deep scars on many American families and their financial
well-being.” She said the drop in house prices has been “a major factor
in the sharp declines in household net worth.”
Even after the recession, “house prices have continued to decline,”
she said with the result that “more than one-fourth of mortgage
borrowers are underwater–that is, have mortgage balances that exceed
the current values of their homes.”
“Because of their negative equity stake, many households cannot
take advantage of lower interest rates by refinancing their mortgages,
nor can they easily sell their homes to pursue better job opportunities
elsewhere,” she said.
“In addition, borrowers who are underwater — especially those who
also experience a job loss or a cut in work hours or wages — are more
likely to default on their mortgages and possibly face foreclosure,” she
continued. “One consequence of the weak demand for housing and the
sky-high rate of foreclosures has been a significant drop in the
homeownership rate.”
Answering her own question about whether there are “any bright
spots in this gloomy picture,” Yellen said, “As the macroeconomy has
begun to improve, albeit at an uneven rate, the share of homeowners
becoming newly delinquent on their mortgages — that is, missing a
payment for the first time — has decreased.”
“In addition, low interest rates and lower house prices have made
homeownership potentially more affordable,” she said. “In fact, by one
measure, housing is hovering around its most affordable level in the
22-year history of the series.”
But she said “tight credit standards have precluded many households
from taking advantage of the affordable conditions.”
“Over time, however, as the economy continues to grow and credit
conditions improve, more households should be able to benefit from the
greater affordability.”
In addition to providing monetary support to housing by holding
down interest rates, Yellen indicated it is doing its utmost to pressure
banks within its purview to do more lending.
“No one wants to see a return to the loose lending standards that
prevailed in the run-up to the crisis, but households and the economy
will benefit if we can foster sustainable homeownership with an increase
in responsible lending,” she said, noting that the Fed and other
agencies recently published two notices of proposed rulemaking that will
affect the provision of mortgage credit.
Introducing Yellen, Cleveland Fed President Sandra Pianalto said
housing is “so critical to our economic recovery.”
** Market News International **
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