By Vicki Schmelzer
NEW YORK (MNI) – The U.S. housing market continues to faces
significant “headwinds, St. Louis Federal Reserve Bank President James
Bullard said Friday.
Bullard offered his observations on a piece “Housing, Monetary
Policy and the Recovery,” co-authored by Michael Feroli, chief U.S.
economist at JPMorgan Chase, Ethan Harris, co-head of global economic
research at Bank of America Merrill Lynch, Amir Sufi, professor of
finance at The University of Chicago Booth School of Business, and
Kenneth West, professor of economics at the University of Wisconsin,
which was presented at the Forum, sponsored by the Chicago Booth School
“The authors counsel that improvement is likely to be very slow and
that in any case, there is no presumption that a booming housing market
would be desirable in the aftermath of the collapse of the bubble,”
“The belief that drove the bubble cannot be reconstituted and
therefore we say that the bubble has collapsed — it is neither feasible
nor desirable to reinflate such a damaging bubble,” he stressed.
The authors point to myriad evidence that goes hand in hand with a
real estate bubble that has been burst, he noted.
“The desired physical housing stock is lower than actual stock,
according to the estimates in the paper, and likely by a substantial
margin,” he said.
“Taken literally, this means that households would like to reduce
square footage and remove amenities in exchange for lower levels of
debt,” Bullard said.
For this to happen, the “natural depreciation in the housing
capital stock” will need to “catch up with household desires,” he said.
Shifting views about the merits of home ownership may mean that the
housing market recovers even more slowly.
“My sense is that the housing debacle of the past five years may
have scared off a generation of potential homeowners,” Bullard said.
New home buyers see home ownership “as a fundamentally risker
proposition” that prior home buyers, “and therefore may be far more
likely to rent rather than own,” he said.
According to St. Louis Fed staff estimates, there are roughly 75.3
million homeowners in the U.S., as per Q3 2011, Bullard said.
Two-thirds of these homeowners had outstanding mortgage debt.
Loan-to-value averaged 58.4% between 1970 and 2005, but rose to 90%
during the crisis and has remained at these lofty levels, Bullard said.
“This picture makes it perfectly clear that homeowners were
borrowing during the bubble phase, not expecting house prices to fall
appreciably,” he noted.
To get back to a desired 58.4% average, “homeowners would have to
pay down mortgage debt collectively by $3,695 billion, about one-year’s
GDP,” Bullard said.
“As the authors suggest via other means, it will take a long time
to get back to that type of steady-state situation,” he added.
In terms of monetary policy, while policy can have a positive
effect on parts of the economy that are not “constrained,” it can “have
more difficulty reaching – or may not be able to reach at all – those
households that are sharply constrained,” Bullard said.
“Earlier arguments sometimes emphasized the idea that once the
central bank encounters zero lower bound, its ability to affect interest
rates is lost,” he said.
Nevertheless, “QE has generally been viewed as effective, both in
the U.S. and abroad in the past several years and the authors post no
quibble with the ability of the central bank to continue to drive real
interest rates lower through unconventional policy actions,” Bullard
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