The sharpest drop in housing prices in 50 years poses a "significant" risk to the U.S. economy, but the Fed's rate cuts should be felt in the second half of the year, according to one Fed official on Friday.
Boston Fed President Eric Rosengren said the U.S. housing market is a small part of GDP but the slump, the effects of which are widespread, may last longer than anticipated.
"Previous periods of real estate problems have taken significant time to be worked out, with foreclosures remaining elevated well after their peak," he said. "The current foreclosure problem has been exacerbated by the difficulties related to many of the problem loans being held in securities."
Rosengren said the extent of the housing problem "is highly dependent on the outlook for the economy and the future path of housing prices," adding that the aggressive monetary and fiscal policy actions will help mitigate some of the downside risks.
"These policies will likely result in some pick up in economic activity in the second half of this year, which should help to stabilize the housing market," he added.
Rosengren said it is important for servicers to help economic growth by making loan modifications where appropriate.
Rosengren explained the economy is experiencing challenges on multiple fronts, but core inflation is contained, the unemployment rate is at 5% and the economy continues to grow. "These relatively benign outcomes to date are at least partly the result of recent monetary and fiscal policy actions taken to mitigate some of the problems facing the economy," he said.
By Patrick McGee and edited by Nancy Girgis