Federal Reserve Bank Chairman Ben S.
Bernanke, speaking to the National Association of Home Builders, said that the
typical post-recession behavior of the housing market, resurging to help fuel
reemployment and rising incomes, has not played out this time and housing remains
a key impediment to a recovery.
The chairman reviewed the current state
of the housing market, telling the builders of a major imbalance between supply
and demand with 1-2/4 million homes currently unoccupied and for sale and 2
million more in the foreclosure process. At the same time, factors are constraining
demand such as a decline in household formation, high unemployment and
uncertain job prospects, and wariness about home ownership as an investment. The availability of credit is another
constraint. This imbalance has been
reflected in a drop in home prices of historic proportions.
In contrast, he said, rental markets
have strengthened somewhat; vacancy rates have declined, rents have increased,
and the construction of apartment buildings has picked up.
Home builders pay close attention to
these issues, Bernanke said, but the problems in housing have important
implications outside the construction industry. Foreclosures diminish the value of nearby
properties and can directly affect the quality of life in a neighborhood by leading
to increases in vandalism or crime. Declining
neighborhoods depress the tax base leading to cutbacks in services and thus a
vicious circle which putts neighborhood stabilization further out of reach.
The decline in home prices and
consequent loss of owner equity has reduced the ability and willingness of households
to spend. There are estimates that
homeowners spend between $3 and $5 less for every $100 of housing value they
lose which means the loss of housing wealth may have an impact on the economy
of $200 to $375 billion in consumer spending per year. Low or negative equity also means homeowners
cannot tap equity to pay for emergencies or college tuition, sell their homes
to move to better job markets, or take advantage of low interest rates by refinancing.
to the subject of mortgage credit, Bernanke said home mortgage credit has
contracted about 13 percent since its peak in 2007. “In
prior recoveries,” he said, “mortgage credit had begun to grow four years after
the business cycle peak–but not this time around.” Much of this is a reaction by lenders to the
fallout from earlier lax standards, but current practices may be limiting or
preventing lending even to creditworthy households. Some lenders are reluctant to loan even to
borrowers who could meet the underwriting standards of the government-sponsored
enterprises (GSEs). “Indeed, fewer than
half of lenders are offering mortgages to borrowers with a FICO score of 620
and a down payment of 10 percent, even though such loans could be within the
GSE purchase parameters.” Bernanke said this may be because of the
difficulty of obtaining private mortgage insurance or a concern on the part of
lenders about representations and warranties.
Another reason for tight lending is that private label mortgage
securitizations have virtually disappeared which may have discouraged lenders from
originating loans that don’t exactly fit GSE or FHA criteria.
Tight credit has disproportionately
affected lending to first-time homebuyers which has dropped dramatically. Younger households are taking out mortgages
at lower rates than 10 years ago, well before prices began their run-up. First-time buyers are an important source of
incremental housing demand so this affects house prices and construction and may
also prevent existing homeowners from buying up.
Tight money has implications for
monetary policy as well and Federal Reserve actions to put downward pressure on
longer term rates and to improve financial conditions have had less effect on
both the housing sector and overall economic activity than they otherwise would
Policymakers have been focusing on
refinancing borrowers, loan modifications, and other ways to prevent more foreclosures
which is important but not all foreclosures can be prevented and there has been
increased focus on reducing the overhang of empty and foreclosed homes.
Bernanke said with home prices
falling and rents rising, it could make sense in some markets to turn
foreclosed homes into rental properties.
The Federal Reserve calculates that most REO properties in metropolitan
areas are in neighborhoods with median house values and incomes similar to
those in the area as a whole and tend to commutable to where jobs are. A financial comparison of annual cash flows
from renting properties to discounted sales of REO suggests that some lenders
might come out ahead renting rather than selling some of their properties.
In addition, keeping paying tenants
in home, including leasing to former owners could be the best way to maintain
property values and the quality of neighborhoods and appropriately structured
REO-to-rental programs could help some involuntary renters become owners again.
Such rental programs have
drawbacks. Bulk selling to investors can
present financing problems, some properties are in too poor condition to be
attractive, and it may be difficult to put together sufficiently large clusters
of properties to allow for economies of scale in their management but Bernanke
pointed to a number of cities where appropriate conditions exist.
Land banks are another option for foreclosed
houses with low value or in poor condition.
Land banks have the ability to purchase and sell real estate, clear
titles, accept donated properties, rehabilitate properties for resale or rental
or even demolish the structure. Not all
states have passed legislation to permit land banks and most existing ones lack
the resources to keep pace with the number of low value properties in the
Bernanke concluded by saying that we
need to continue to develop and implement policies that will help housing get
back on its feet. Sustained efforts to
address the many interlocking factors hold the market back will pay dividends
in the long run.