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."
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
"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."