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Fed, Treasury Say Housing Hampering the Economy
Despite strong economic fundamentals, the current housing downturn remains the most serious threat to the economy in the near-term, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke said in separate remarks last week.
“The ongoing housing correction is not ending as quickly as it might have appeared late last year,” Paulson said during an address before the Georgetown Law Center in Washington, D.C. “And it now looks like it will continue to adversely impact our economy, our capital markets and many home owners for some time yet.”
“Even so, I believe we have a healthy, diversified economy that will continue to grow,” he said.
Echoing a similar theme, Bernanke said in a speech before the Economic Club of New York said that U.S. economic performance so far this year has been “reasonably good” despite a notable contraction in housing that began in the second half of 2005.
Since the last meeting of the Federal Open Market Committee in September, when the Fed announced it was cutting short-term interest rates by one-half of a percentage point, the housing market has weakened further, said Bernanke.
“The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year,” he said. “However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions.”
Paulson observed that this is the first housing downturn in the past three decades in which U.S. GDP growth has not turned negative.
“Business investment has expanded in recent months, our exports are being boosted by the strong economic growth of our trading partners and the healthy job market has helped consumer spending continue to grow,” he said.
“But let me be clear,” Paulson cautioned, “despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”
Aggressive Response Needed to Help Families Facing Foreclosure
Paulson called for an aggressive government response to deal with the current housing situation, stating that the first priority is to “help as many able home owners as possible stay in their homes.”
To help families facing foreclosure, Paulson cited a new government program to assist distressed borrowers unveiled by the Administration on Oct. 10. “HOPE NOW” is a program that will bring together foreclosure prevention counselors, mortgage servicers and other mortgage market participants to help home owners who are facing default avoid foreclosure and stay in their homes.
No Interest in Bailing Out Speculators, Lenders
In moving to help families in need, he stressed that the government is not sending a signal that it intends to protect investors from the consequences of their financial decisions.
“When investors are relieved of the costs of bad decisions, they are more likely to repeat their mistakes,” said Paulson. “I have no interest in bailing out lenders or property speculators.”
He also called for changes in laws and regulations that govern mortgage lending to “prevent some of the excesses and abuses of the last few years from happening again,” but cautioned that it must be done in a prudent way to “avoid overreacting and introducing unintended consequences such as those that might shut off credit to able borrowers.”
Paulson also urged Senate action on several House-passed measures that address NAHB policy concerns — FHA modernization (H.R. 1852), mortgage debt forgiveness (H.R. 3648) and reform of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac (H.R. 1427).
“FHA reform is moving through Congress, and I am hopeful that it will reach the President’s desk soon,” he said. “The tax relief proposal has cleared the House and is awaiting further action in the Senate. GSE reform has cleared the House, and also awaits action in the Senate. Congress should enact these bills as quickly as possible.”
Though the subprime mortgage market turmoil has sent shock waves through the investment community in recent months, Bernanke said that market participants are learning and adjusting from this experience by insisting on better mortgage underwriting and by performing better due diligence on structured credit products.
“Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before,” Bernanke said.
In a concurring assessment, Paulson said, “As the mortgage and credit markets continue to adjust, all of us — policymakers and market participants — will no doubt learn new lessons. Through a dedicated effort by all parties, we will work to strike the right balance, protect consumers and make mortgage capital widely available to Americans ready to be home owners.”
 Attend the Fall Construction Forecast Conference in October
Plan to attend NAHB's Construction Forecast Conference on Oct. 24 at the National Housing Center in Washington, D.C. The conference brings together the nation's premier housing economists and finance experts for an in-depth examination of the economic outlook for the housing industry.
Can't attend? Watch the conference webcast live.
For more information, or to register for the conference or webcast, visit www.nahb.org/cfc.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2007-2008 Metro Forecast (free preview). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
 Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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