Pro-active housing policies may be needed to spur a recovery in the housing sector, according to Federal Reserve Board chairman Ben Bernanke.
Housing is in a “very deep slump,” the Fed chief told central bankers at their annual Jackson Hole, Wyo., retreat.
The overhang of foreclosed properties, declining house prices and high default rates continues to create financial hardship on households and stress on financial institutions.
In addition, potential homebuyers and builders are facing tight conditions.
However, Bernanke is optimistic about a housing recovery.
“Over the medium term, housing activity will stabilize and begin to grow again, if for no other reason than that ongoing population growth and household formation will ultimately demand it,” he said. “Good, proactive housing policies could help speed that process.”
Bernanke did not suggest any initiatives, but he could be signaling support for the Obama administration to act.
Administration officials are considering ways to soak up foreclosed properties and turn them into rentals while launching a plan to turn to help “underwater” borrowers refinance at lower rates.
The Fed chief also criticized policymakers Friday for the political wrangling over raising the country's debt limit, and warned that more such events could do even greater harm to the economy.
"The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," said Bernanke, in a widely watched speech at a conference hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wy.
Then again, that political bickering also led to the lowest mortgage rates the nation has seen in 50 years.
Most of the economic policies needed to support U.S. growth in the long-run will come from outside of the Fed, Bernanke said. That's why policymakers should create a more effective process that sets clear and transparent budget goals.
The U.S. economy has been struggling to get back on its feet, hurt by an ailing housing market and the aftershocks of the financial crisis. The Federal Open Markets Committee had to revise its projections for the year after economic growth slowed considerably in the first half of 2011.
Bernanke offered some optimism, but stressed the importance of how future fiscal policy will be crafted as critical to a long-term recovery.
"I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome," said Bernanke. Otherwise, he warned, "without significant changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.
