Bernanke on Housing

Ben Bernanke spoke before the National Italian American Foundation, New York, New York about the US economic outlook:

"Housing has played a significant role in the recent slowing of overall activity, and developments in this sector are likely to have an important influence on economic growth going forward as well. As you know, the correction in the housing market that is now in train follows a boom during the first half of this decade. Between 2000 and late 2005, the pace of construction of single-family homes rose more than 40 percent, and sales of both new and existing homes increased by a similar amount. Nationally, home prices increased about 60 percent over that period--an average figure that masks considerable variation in the rate of price appreciation across cities and regions, as home prices rose exceptionally rapidly in some "hot" locations but only modestly in others."

"No real or financial asset can be counted upon to pay a higher risk-adjusted return than other assets year after year, and housing is no exception. Thus, a slowing in the pace of house-price appreciation was inevitable. Moreover, the sustained rise in prices, together with some increase in mortgage interest rates, sowed the seeds of the correction by making housing progressively less affordable. Declining affordability ultimately served to limit the demand for housing, leading to a deceleration in house prices and slowing home purchases."

"The drop in home sales that began earlier this year has led homebuilders to curtail the rate of new construction. Indeed, single-family housing starts are down about 35 percent since their peak earlier this year. Obtaining a precise read on home prices is difficult: During a period of weak demand, potential sellers often choose to leave their homes on the market longer or even to remove them from the market, rather than accept price offers that are below their expectations. The timeliest data on house prices do not fully account for changes in the composition of home sales by location, size, and other characteristics. Moreover, the data do not capture hidden price cuts, as when builders try to stimulate sales through the use of "sweeteners" such as paying the customer's mortgage points or upgrading features of the house at no additional cost. Nevertheless, there can be little doubt that the rate of home-price appreciation has slowed significantly for the nation as whole. Some areas have continued to experience gains--albeit smaller ones than before--while other markets have seen outright price declines. "

"Notwithstanding the sharp reduction in starts of new single-family houses, inventories of both new and existing homes for sale have increased markedly this year. For example, according to the most recent data, homebuilders currently have about 550,000 new homes for sale, roughly half again the number that has been typical during the past decade. Moreover, the official statistics likely understate the full extent of the inventory buildup, as many homebuilders have reported a sharp increase this year in the number of buyers canceling signed contracts. A home for which the sales contract is cancelled becomes available for sale once again but is not included in the official data on the inventory of unsold new homes. To reduce this inventory overhang, builders are likely to continue to limit the number of new homes under construction."

"Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets. Sales of new homes ticked up in August and increased a bit further in September. The University of Michigan's survey of consumers shows an increase in the share of respondents who believe that now is a good time to buy a home, from 57 percent in September to 67 percent in November. Meanwhile, an index of applications for mortgages for home purchases has been trending up since July. Although these developments are encouraging, we should keep in mind that even if demand stabilizes in its current range, reducing the inventory of unsold homes to more normal levels will likely involve further adjustments in production. The slowing pace of residential construction is likely to be a drag on economic growth into next year. "