Tuesday, March 23, 2010

Fed President: The Great Bust Wiped Out $7 Trillion in Housing Value and Housing Is Turning Down Again

San Francisco Bank President Janet Yellen, who it is expected to be nominated for the Federal Reserve vice-chairmanship by President Obama, told a Los Angeles Town Hall audience that,
The great bust wiped out some $7 trillion in home values...[and that, while] In the second half of 2009...housing showed signs of stabilizing and I became hopeful that the sector would provide a significant boost to the economy this year. Now the market seems to have stalled. Home prices have been more or less stable since the middle of last year, but new home sales have resumed a downward slide and are at very low levels. Existing home sales spiked towards the end of last year in response to the homebuyer tax credit and have receded markedly since then. The credit expires this spring, removing an important prop. With sales still weak, builders have little incentive to ramp up home construction.

The continued high pace of foreclosures also creates risks to the recovery of the housing sector. Mortgage delinquencies and foreclosures are still rising as a consequence of the plunge in house prices over the past few years combined with high levels of unemployment. Despite the return to growth of the broader economy, we’ve seen no let-up in the pace at which borrowers are falling behind in their loans. Further additions to the already swollen stockpile of vacant homes represent a threat to house prices and new home construction activity.

It’s not always easy to understand the dynamics of the housing sector. Last year, for example, the share of mortgages that was 30 to 89 days past due declined. On the face of it, that looked like a hopeful sign. Unfortunately, when my staff examined the numbers more closely, it turned out that the drop actually represented a worsening of mortgage market conditions. What you want to see is delinquent borrowers becoming current. Instead, what happened was that delinquent mortgages moved in the other direction to an even poorer performance status. Many wound up in foreclosure. All in all, I expect that the share of loans that are seriously delinquent will continue to move higher. I am also concerned that we had a temporary reprieve in new foreclosures as the federal government’s trial modification program got under way. But not all of these modifications will stick, which means that some borrowers in the program could find themselves facing foreclosure again.
Bottom line, as the Fed stops propping up the housing market it will turn lower, although I continue to believe that the stock market will ultimately show the most weakness as we double dip.

1 comment:

  1. Given the recent market gains and especially with the current low volume investment environment, I would agree. With the performance of the market lately it's a test of those who prefer to feel safe with a longer term view versus those who desire to not be left out. Looking how I got clobbered in '08 to '09, I'll take what I gained in Q2-Q4 '09 and call it a win for now.