Fed President Lockhart on the housing market

Federal Reserve Bank of Atlanta President Dennis P. Lockhart's comments on the state of the housing market, presented before the Greater Miami Chamber of Commerce:

As you know, residential real estate was the catalyst of problems in credit markets. Problems in housing contributed to economic weakness, but now the slowing economy is feeding back into the continued housing slowdown. South Florida has been among the hardest-hit residential markets, so let me spend a few moments discussing housing.

At the current pace of sales, the nation's supply of new homes is more than 13 months—the highest on record. Sales of new single-family homes fell 10 percent in January, and existing homes fell more than 5 percent.

Home prices here in Miami—after a steep run-up during the housing boom—have fallen 41 percent from a peak in December 2006. Nationally, house prices in 20 major MSAs have fallen almost 27 percent since their peak in the second quarter of 2006, according to the S&P/Case-Shiller index.

Other measures show smaller declines nationally. There's no doubt, though, that declining house prices have been a major driver of mortgage delinquencies, defaults, and foreclosures. What's happening is a profound revaluation of mortgage portfolios as well as securities in the global secondary market for mortgage-backed securities.

Efforts to prevent foreclosures appear to have had only modest success so far. There are many reasons this might be the case, but among them is the obstacle posed by securitization agreements to loan modifications. To date, payment-reducing modifications have been the exception rather than the rule. As a result, redefault rates have been high, and new foreclosures continue to add downward pressure on housing prices.

I should also comment on the weakening multifamily residential real estate picture. No two rental markets are exactly alike. But to generalize, those markets trending the worst probably share one or more characteristics. They had excessive condo construction or condo conversion activity. Such markets are seeing unsold units return as rentals. They had very high home price appreciation in the years 2004—07 with large amounts of speculative house construction activity. Today, in several markets, houses compete with apartments as rentals. And they have been experiencing high and rising foreclosure rates.