Bernanke Speaks to Home Builders on Housing's Role in Recovery

Federal Reserve Bank Chairman Ben S.rnBernanke, speaking to the National Association of Home Builders, said that therntypical post-recession behavior of the housing market, resurging to help fuelrnreemployment and rising incomes, has not played out this time and housing remainsrna key impediment to a recovery.</p

The chairman reviewed the current staternof the housing market, telling the builders of a major imbalance between supplyrnand demand with 1-2/4 million homes currently unoccupied and for sale and 2rnmillion more in the foreclosure process.  At the same time, factors are constrainingrndemand such as a decline in household formation, high unemployment andrnuncertain job prospects, and wariness about home ownership as an investment.  The availability of credit is anotherrnconstraint.  This imbalance has beenrnreflected in a drop in home prices of historic proportions.</p

In contrast, he said, rental marketsrnhave strengthened somewhat; vacancy rates have declined, rents have increased,rnand the construction of apartment buildings has picked up.</p

Home builders pay close attention tornthese issues, Bernanke said, but the problems in housing have importantrnimplications outside the construction industry.  Foreclosures diminish the value of nearbyrnproperties and can directly affect the quality of life in a neighborhood by leadingrnto increases in vandalism or crime.  Decliningrnneighborhoods depress the tax base leading to cutbacks in services and thus arnvicious circle which putts neighborhood stabilization further out of reach.</p

The decline in home prices andrnconsequent loss of owner equity has reduced the ability and willingness of householdsrnto spend.  There are estimates thatrnhomeowners spend between $3 and $5 less for every $100 of housing value theyrnlose which means the loss of housing wealth may have an impact on the economyrnof $200 to $375 billion in consumer spending per year.  Low or negative equity also means homeownersrncannot tap equity to pay for emergencies or college tuition, sell their homesrnto move to better job markets, or take advantage of low interest rates by refinancing.</p

Returningrnto the subject of mortgage credit, Bernanke said home mortgage credit hasrncontracted about 13 percent since its peak in 2007.  “Inrnprior recoveries,” he said, “mortgage credit had begun to grow four years afterrnthe business cycle peak–but not this time around.”  Much of this is a reaction by lenders to thernfallout from earlier lax standards, but current practices may be limiting orrnpreventing lending even to creditworthy households.  Some lenders are reluctant to loan even tornborrowers who could meet the underwriting standards of the government-sponsoredrnenterprises (GSEs).  “Indeed, fewer thanrnhalf of lenders are offering mortgages to borrowers with a FICO score of 620rnand a down payment of 10 percent, even though such loans could be within thernGSE purchase parameters.”   Bernanke said this may be because of therndifficulty of obtaining private mortgage insurance or a concern on the part ofrnlenders about representations and warranties. rnAnother reason for tight lending is that private label mortgagernsecuritizations have virtually disappeared which may have discouraged lenders fromrnoriginating loans that don’t exactly fit GSE or FHA criteria.</p

Tight credit has disproportionatelyrnaffected lending to first-time homebuyers which has dropped dramatically.  Younger households are taking out mortgagesrnat lower rates than 10 years ago, well before prices began their run-up.  First-time buyers are an important source ofrnincremental housing demand so this affects house prices and construction and mayrnalso prevent existing homeowners from buying up.</p

Tight money has implications forrnmonetary policy as well and Federal Reserve actions to put downward pressure onrnlonger term rates and to improve financial conditions have had less effect onrnboth the housing sector and overall economic activity than they otherwise wouldrnhave.</p

Policymakers have been focusing onrnrefinancing borrowers, loan modifications, and other ways to prevent more foreclosuresrnwhich is important but not all foreclosures can be prevented and there has beenrnincreased focus on reducing the overhang of empty and foreclosed homes.</p

Bernanke said with home pricesrnfalling and rents rising, it could make sense in some markets to turnrnforeclosed homes into rental properties. rnThe Federal Reserve calculates that most REO properties in metropolitanrnareas are in neighborhoods with median house values and incomes similar tornthose in the area as a whole and tend to commutable to where jobs are.  A financial comparison of annual cash flowsrnfrom renting properties to discounted sales of REO suggests that some lendersrnmight come out ahead renting rather than selling some of their properties. </p

In addition, keeping paying tenantsrnin home, including leasing to former owners could be the best way to maintainrnproperty values and the quality of neighborhoods and appropriately structuredrnREO-to-rental programs could help some involuntary renters become owners again.</p

Such rental programs haverndrawbacks.  Bulk selling to investors canrnpresent financing problems, some properties are in too poor condition to bernattractive, and it may be difficult to put together sufficiently large clustersrnof properties to allow for economies of scale in their management but Bernankernpointed to a number of cities where appropriate conditions exist.</p

Land banks are another option for foreclosedrnhouses with low value or in poor condition. rnLand banks have the ability to purchase and sell real estate, clearrntitles, accept donated properties, rehabilitate properties for resale or rentalrnor even demolish the structure.  Not allrnstates have passed legislation to permit land banks and most existing ones lackrnthe resources to keep pace with the number of low value properties in therncurrent market.</p

Bernanke concluded by saying that wernneed to continue to develop and implement policies that will help housing getrnback on its feet.  Sustained efforts tornaddress the many interlocking factors hold the market back will pay dividendsrnin the long run.

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