Federal Reserve Chairman Ben Bernanke addressed the housing market today at the 2012 National Association of Homebuilders International Builders’ Show in Orlando, Florida (our backyard! Wow, Ben, you didn’t even let me know you were coming, I could have cleaned up the house).
Specifically, Bernanke gave a speech titled “Housing Markets in Transition” where he discussed the current problems in the real estate market, which everyone knows sucks.
After listening to his extremely boring speech, I would have to say I would have respected him more if he just went up there and said “The housing market just plain sucks,” and then hit the Orange County Convention Center food court.
Let’s take a look at the prepared speech, which he followed pretty closely:
Though some progress has been made in reversing the losses in jobs and income sustained during the recession, the pace of expansion has been frustratingly slow and the unemployment rate remains very high by historical standards. The state of the housing sector has been a key impediment to a faster recovery. In the typical economic recovery, a resurgent housing sector helps fuel reemployment and rising incomes. But as you know all too well, that scenario has not played out this time. Homebuilding remains depressed in most areas, relative both to where it was before the downturn and to where it will need to be to meet the needs of a growing population in the longer term.
Tell us something we don’t know, Benny.
About 1-3/4 million homes are currently unoccupied and for sale, up dramatically from the first half of the 2000s, when readings of about 1-1/4 million vacant homes were the norm.
He goes on to state that in Florida the homeowner vacancy rate for the 3rd quarter 2011 was 3.2% (higher than the national average of 2.4%). What about foreclosures? Do you have good news, Ben?
Looking ahead, the relatively high rate of foreclosures is likely to continue for a while, putting additional homes on the market and dislocating families and disrupting communities in the process.
Oh, daym. Well, what’s the holdup?
A number of factors are constraining demand. High unemployment and uncertain job prospects may have reduced the willingness of some households to commit to homeownership. Availability of mortgage credit is an important constraint. Additionally, housing may no longer be viewed as the secure investment it once was thought to be, given uncertainty about future home prices and the economy more generally. House prices have plunged about 30 percent in nominal terms from their peak and nearly 40 percent in inflation-adjusted, terms. The imbalance of supply and demand has also been reflected in the decline in home construction.
Hmm, Ben, this is stuff that a high school kid would put together for a speech class assignment. None of this is news. (Although I’m slightly shocked that you would admit the part about housing no longer being a secure investment!) Now’s the part when you earn your speaking fee, right?
Rental markets around the country have strengthened somewhat. Vacancy rates for rental properties have declined, rents have been increasing and the construction of apartment buildings has picked up.
Right. So, after that, Ben continues stating the obvious negative effects – loss of construction jobs, lowered values of homes because of the foreclosures around them, increases in crime because of lower quality of life in neighborhoods, depressed tax base, vicious circles, loss of wealth, less consumer spending, no health care or college educations. Check, check, check. Then Ben states even more obvious facts: the recovery has been so slow because
- Constraints on mortgage credit – credit has retracted about 13% in real terms. Lending instititions have tightened their underwriting conditions dramatically. “For example, mortgage originators appear to be reluctant to extend credit to some potential borrowers who could meet the underwriting standards currently set by the GSEs. Fewer than half of lenders are offering mortgages to borrowers with a FICO score of 620 and a down payment of 10 percent, even though such loans could be within the GSE purchase parameters.”
- private-label mortgage securitizations have “virtually disappeared”
- Lending to potential first-time homebuyers has dropped “precipitously”
Basically, what Ben is saying here is that lenders won’t lend. They’re terrified. Well, why shouldn’t they be? What would they get out of lending anyway? High rates of return? Yeah, right, Ben has taken that away well into 2014.
Ben seems to think that the “pendulum has swung too far the other way” in regards to extension of credit.
Well here’s one solution that Bernanke has been pushing to help solve the housing market problems: REO-to-Rental programs.
With home prices falling and rents rising, it could make sense in some markets to turn some of the foreclosed homes into rental properties.
He mentions REO-to-Rental more than once. The other thing he talked about was “land banks” for homes in poor condition:
Land banks are typically governmental entities that have the ability to purchase and sell real estate, clear titles, and accept donated properties. Properties may be rehabilitated as rental or owner-occupied housing or, in extreme cases, demolished.
Closing with more platitutes, Ben says:
“We need to continue to develop and implement policies that will help the housing sector get back on its feet. No single solution will be sufficient. But sustained efforts to address the many interlocking factors holding back the housing market will pay dividends in the long run.”
But other than suggesting that banks should lend more, or that they should basically turn into slumlords, I didn’t hear a lot of detail. Even a Q&A that brought up a recent white paper revealed that said white paper was only meant to “make people aware of how central to the recovery housing is.” (applause from crowd) and not to offer any specific recommendations.
When asked about potential setbacks, Ben talked about Europe’s problems, not getting our own fiscal policy in order (applause from crowd), and then unanticipated events (like Japan’s disaster last year or political upheaval in the middle east, something Ben referred to as “unknown unknowns.”)
All in all, Ben’s housing market speech was well received by the IBS crowd, that is – those who didn’t fall asleep. But if you were looking for any suggestions for fixing the housing market problems, besides everybody just turning their homes into rentals, then look elsewhere. I’m happy that Ben was at least able to enjoy our nice Orlando weather.