Federal Reserve Governor Elizabeth A. Duke told members of the Senate Committee on Banking, Housing, and Urban Affairs that "the failure of the housing market to respond to lower interest rates as vigorously as it has in the past indicates that factors other than financial conditions may be restraining improvement in mortgage credit and housing market conditions and thus impeding the economic recovery."

Six years after house prices first started to decline and more than two years after the start of economic recovery, Duke said, the housing market remains a significant drag on the U.S. economy.  She explained that typically as an economy turns down, households postpone purchases of durable goods such as housing.  But when the upturn comes, improving economic prospects and diminishing uncertainty, often helped by low interest rates, usually unleash pent-up demand.   

"The current economic recovery has not followed this script, in part because the problems in the housing market are a cause of the downturn as well as a consequence of it," she said.  The nation has lost an aggregate of $7 trillion in home equity.  The extraordinary fall in national house prices has resulted in $7 trillion in lost home equity, more than half of what was there in 2006.  This fall in wealth has significantly weakened household spending and consumer confidence.  In addition, around 12 million households are now underwater on their mortgages and when hardships hit have been unable to resolve mortgage payment problems by selling their homes, resulting all too often in foreclosure, dislocation, and personal adversity. Neighborhoods and communities suffered as well from the neglect and deterioration that accompany vacant properties and puts further downward pressure on house prices.

These problems, Duke told the Senators, have been exacerbated by an ongoing imbalance between supply and demand.  In recent years that supply of single-family homes has greatly exceeded the demand in part because of foreclosures which are likely to continue for quite a while.  At the same time, a host of factors have been weighing on demand.  Families have been reluctant or unable to purchase homes because of concerns about income, employment, or where prices might go.  Tight mortgage credit conditions have also been a factor.  Although some retrenchment in lending standards was necessary after the lax standards that prevailed before the crisis, current lending practices appear to be limiting or preventing lending, even to creditworthy households.

Duke referred to a paper titled The U.S. Housing Market:  Current Conditions and Policy Considerations released by the Federal Reserve on January 4, 2012.   In the paper, she said, Federal Reserve staff discussed the benefits and costs of a variety of policy options that have been proposed to respond to these difficult housing issues, including increasing credit availability, exploring the scope for further mortgage modifications including encouraging short sales and deeds-in-lieu of foreclosure, and expanding the options available for holders of foreclosed properties to dispose of their inventory responsibly. "Any policy proposals, though, will require wrestling with difficult choices and tradeoffs, as initiatives to benefit the housing market will likely involve shifting some of the burden of adjustment from some parties to others."