Bernanke: ‘Out of Balance’ Housing Market Restrains Recovery

Diminished home equities, tighter mortgage credit and the “overhang of foreclosed and vacant homes,” has restrained the comeback of the economy, unlike any other U.S. recovery, said Federal Reserve Chairman Ben Bernanke in a speech to home builders in Orlando, Fla.
Bernanke outlined the three key areas that have held back the recovery of the housing market, and in turn, the restoration of the broader economy: diminished household wealth from plummeting home prices, tighter standards for access to mortgage credit and the impact of foreclosures on communities.
“In sum, the economic recovery has been disappointing in part because U.S. housing markets remain out of balance,” Bernanke said.
Falling home prices have reduced homeowners’ equity by more than 50 percent, by some estimates, resulting in more than a $7 trillion loss of household wealth.
One of the effects of declines in housing wealth has been the lack of willingness by families to spend, Bernanke said.
“That reduction corresponds to lower living standards for many Americans,” Bernanke said. “And, importantly, lower sales of goods and services also reduce the incentives of firms to invest and hire, thereby slowing the recovery.”
About 12 million homeowners – more than 1 out of 5 with a mortgage – are underwater, meaning they owe more on their mortgages than the values of their homes.
“While estimates vary, homeowners are believed to spend somewhere between $3 and $5 per year less for every $100 of housing value lost,” the Fed chief said. “Based on those estimates, it appears that recent declines in housing wealth may be reducing consumer spending between $200 billion and $375 billion per year.”
Potential first-time homebuyers have been “disproportionately affected” by stricter access to credit, he said.
“Lending to potential first-time homebuyers has dropped precipitously, even in parts of the country where unemployment rates and housing conditions are better than the national average,” Bernanke said.
He said regulators are encouraging lenders to expand lending to creditworthy borrowers while maintaining “prudent lending standards.”
But homeowners and lenders alike have to deal with the foreclosure crisis, which is key a key factor in declining home values and the deterioration of neighborhoods, the Fed chairman said.
“A vicious circle can get started: Increasing vacancies together with decreasing tax revenue and consequent cutbacks in services can further depress home prices, putting the goal of neighborhood stabilization even further out of reach,” Bernanke said.
Bernanke painted a bleak picture of the crisis, despite private and government-backed mortgage modification efforts to prevent foreclosures.
“Given the weak economy and high unemployment rates, some borrowers simply do not have the wherewithal to meet monthly mortgage payments, even if their loans were to be substantially modified,” Bernanke said. “Therefore, we have seen increased interest in whether anything can be done to reduce the overhang of empty and foreclosed homes.”
One solution is a large-scale program renting REO (banked-owned) properties, he said.
The Fed compared expected annual cash flows from renting properties to the discounted prices that REO property holders typically receive when selling a home.
The comparison suggests that some REO holders might come out ahead by renting, rather than by selling, some of their properties.
“Moreover, keeping paying tenants in homes–including leasing to the former owners at market rents – may, in some cases, be the best way to maintain property values and the quality of neighborhoods,” Bernanke said.

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