Banking

Strong housing markets have historically helped propel economic recoveries, but housing has not played that role in the current recovery, said Federal Reserve Chairman Ben Bernanke during a February 10 speech.

In remarks before the National Association of Homebuilders, Bernanke discussed some of the factors restraining the U.S. housing market and suggested some approaches to help manage the supply of vacant homes for sale. Recent estimates put the supply of vacant properties on the market at 1.75 million houses, significantly higher than the 1.25 million vacant homes that were the norm a decade ago, he noted.

Housing demand in decline
At the same time, demand for homes has dropped markedly. One reason for weaker housing demand is the lower rate of household formation, especially among young adults. Further, the weak job market and concerns about future house prices are also causing some people to forgo homeownership, while tight credit conditions have kept many potential homeowners on the sidelines. First-time homebuyers are having an especially hard time obtaining mortgage credit, Bernanke noted. Moreover, this group is a significant source of incremental housing demand, so their absence from the market is affecting home prices, construction, and the ability of current homeowners to move into larger homes, he explained.

Bernanke also highlighted the way in which tight mortgage credit conditions are affecting monetary policy, in part by dampening the effect of the Fed's actions to push down longer-term rates. As a result, these steps "have had less effect on the housing sector and overall economic activity than they otherwise would have had."

Policy plays a role
Policymakers have largely focused on policies to reduce the number of foreclosures. While that task is an important one, some foreclosures are unavoidable. Bernanke suggested several strategies to manage the large overhang of homes that make it into the foreclosure process. Many of these real estate–owned (REO) properties could be turned into rentals, which would help meet rising demand among families that are unable or reluctant to purchase homes.

However, REO-to-rental programs are not a silver bullet, the chairman warned, pointing to several challenges they present. For instance, rental investors have had trouble obtaining financing in some cases. Also, not all vacant properties are suitable for rentals—some are in poor condition, while others are not located close enough to other rentals to be managed easily, Bernanke explained.

Land banks may be a better option in some cases, especially for properties that have low value or are in poor condition. That approach comes with challenges. For one, many existing land banks are ill equipped to deal with the current supply of low-value properties.

"No single solution will be sufficient," Bernanke concluded, but these and other neighborhood stabilization efforts could help bring housing supply and demand into better alignment.

February 27, 2012