Falling Home Prices Still A Threat To Economy

BOSTON - May 30 2008 - Falling home prices continue to threaten U.S. economic growth, and banks could face trouble from rising delinquencies in consumer debt, Boston Federal Reserve President Eric Rosengren said on Friday.

Rosengren noted that the housing sector’s free-fall, which he characterized as the worst in 50 years, has taken place against a backdrop of relatively low unemployment.

Any rise in joblessness could put more pressure on an already wobbly economy, he said.

“This has been an unusually long period of continuous decline in the housing sector, and coupled with falling housing prices nationally, has complicated predictions of what will happen in the economy going forward,” Rosengren told a conference at the Boston Fed.

“Falling housing prices continue to be a significant source of down-side risk to the economy,” he said.

Rosengren, however, did say he sees growth picking up later in the year.

U.S. gross domestic product grew very modestly during the past two quarters, and home prices have dropped nearly 15 percent nationally, according to the Standard & Poor’s/Case Shiller index.

Rosengren said the Fed’s aggressive monetary policy, which has taken the benchmark lending rate down to 2 percent from 5.25 percent in just nine months, has in part buffered the worst effects of the decline in home values.

PAIN PROBABLY NOT OVER

Still, he cautioned that the pain was probably not over, saying that defaults on home equity loans and other forms of consumer credit could compound the woes already being felt by many financial institutions.

“Should the unemployment rate rise and housing prices continue to fall, financial stresses caused by the housing correction could well spread beyond the large banks involved in complex securitizations and the smaller banks with sizable portfolios of construction loans, to a larger set of financial institutions,” he said.

Rosengren said banks with large exposures to consumer loans have been reporting higher delinquencies in regions that have been especially hard hit by the housing debacle.

Despite these gloomy predictions, Rosengren argued that the Fed’s raft of interest rate cuts should allow economic growth to pick back up in the second half of the year.

He also sounded less concerned about the risk of inflation than many of his Fed colleagues have in recent remarks.

“The rise in prices of ‘core’ consumer goods and services to a little above 2 percent, while unwelcome, has not been large compared with past episodes,” he said.

RETHINKING RATINGS

Asked about the role of ratings agencies in the current crisis, Rosengren said there were clear conflicts of interest in the way they were run.

He said regulators must figure out how to ensure that triple-A ratings become more reliable markers of truly safe assets.

“We need to take a hard look at that,” he said, adding “it has become clear that there were gaps in regulations.”

Rosengren said, however, that securitization should not be discarded altogether, despite the problems that have arisen.

He said it was important to find ways to restructure that market and “get it back up and running.”

Housing still a threat to economy: Fed’s Rosengren
by Pedro Nicolaci da Costa | Reuters