The Fed's recent report on current conditions and policy considerations in the housing market points to barriers to recovery that have been persisting beyond its sphere of influence despite its stimulus efforts.
Whatever else anyone might say about the Fed and its chairman, Ben Bernanke, you can't say they have not been active in trying to bolster the economy and housing, and there is some consensus that problems beyond their reach have something to do with why all that activity has not been more effective.
“Bernanke is the opposite of laissez-faire. He is very creative. He's been actionable. I think he's done everything in his power to be supportive of this U.S. housing market and he may not be finished,” said Kevin Cavin, a mortgage strategist at Sterne AG, when asked about the Fed chair's track record so far when it comes to housing.
But while the Fed chairman and other Fed officials have been very creative with attempting to stimulate the economy and supporting a recovery in the housing market, “there are just a lot of things out of his control,” Cavin said in an interview with this publication.
Among the factors preventing recovery in housing is the “liquidation lag” associated with foreclosed properties, he said. “Until we can significantly reduce the shadow supply of foreclosed homes, it will be difficult to engineer sustained recovery in housing,” Cavin said.
“One way to facilitate a more rapid recovery in housing is to reform the legal process, that's not in the fed's arsenal,” he said. “A lot of foreclosure laws are implemented at state level.”
The Fed's paper addresses the shadow inventory issue, suggesting forms of government intervention that could assist such as a REO-rental program and an expansion of the Home Affordable Refinance Program to nonagency and non-FHA mortgages as well as increased use of foreclosure alternatives like deeds-in-lieu or short sales.
As a Fitch analysis of the paper notes, there are operational and political challenges to the first two, but the third seems relatively accessible as it is already in practice to an extent.
“The use of these alternative methods has increased dramatically over the past two years,” noted Suzanne Mistretta, senior director at Fitch Ratings, in an interview.
There has been progress made toward the key issue such efforts address, the need to stabilize home prices, noted Josh Feinman, chief economist for Deutsche Bank's asset management unit DB Advisors, when asked about Bernanke's track record in housing and the Fed's paper.
“Prices have fallen a lot and are better aligned with fundamentals, especially at these low interest rates,” he said in an interview. Ultimately this “slow, grinding process” will cure housing, Feinman said.
“The Fed has helped there by keep interest rates as low as possible,” he added.
But Feinman agrees that a lot of the issues the Fed's paper touches upon have been outside the its scope, and that has blunted the Fed's economic stimulus tools.
Housing typically leads the way out in an economic recovery, but “that channel is significantly clogged, diluting the efficacy of the Fed's economic policy,” he said.
Feinman said he believes there are still future actions the Fed could take that could help if the dim signs of recovery in the housing market were to founder and such actions were needed to an extent that would outweigh political barriers to further governmental involvement.
