A disappointing rebound in U.S. housing continues to trip up the country’s overall economic recovery, two influential Federal Reserve officials said on Friday, highlighting a corner of the economy that still frustrates monetary policymakers.
New York Federal Reserve Bank President William Dudley said the housing market’s failure to fully respond to the Fed’s easy money policies remains a headwind to U.S. growth, while Elizabeth Duke, a governor at the central bank, highlighted problems associated to the “extraordinary” level of abandoned properties.
A bubble in the U.S. housing market was at the core of the 2007-2009 financial crisis and the lackluster environment that continues to hamper the world economy today.
Though national house prices have edged up this year, Dudley said credit availability remains “impaired” and the overall pace of the broader U.S. economic recovery has been disappointing.
“While there are several headwinds that have been restraining economic growth, a key impediment is that the housing market has failed to respond fully to the significant easing of monetary policy,” Dudley said at a residential real estate conference hosted by the New York Fed.
The central bank has kept benchmark interest rates ultra low for nearly four years and has bought more than $2 trillion in large-scale assets to kick-start growth and get Americans back to work. It launched a third round of asset buying last month and signaled it would keep rates near zero for three more years.
Many economists believe the housing market has finally turned a corner as prices have started to stabilize, while home sales were around two-year highs in August. But the large overhang of foreclosures and the many people who are underwater on their homes are among the hurdles the sector still faces.
Dudley, who as head of the powerful New York Fed bank has a permanent vote on monetary policy, said “various housing market indicators have looked somewhat better of late,” including home prices.
But he said the absolute level of housing starts remains low and housing market conditions vary across the country, causing problems. “The net result is that while housing’s contribution to growth has finally turned positive, its magnitude is far below that experienced in previous recoveries,” Dudley said.
U.S. growth cooled in the second quarter to a tepid 1.3 percent annual rate, and forecasters do not think the economy is expanding much faster. Yet in a promising sign for the economy, data earlier on Friday showed that the U.S. jobless rate fell to a near four-year low of 7.8 percent last month, from 8.1 percent in August.
In a speech that dug into the details of where and why homes became vacant, Duke identified three broad categories that described most concentrations of abandoned U.S. homes: post-housing boom neighborhoods, poorer inner city districts, and less-obvious suburban communities in prolonged decline.
“Doubtless there will be costs associated with solving these problems, but it is important to also consider the costs of doing nothing,” Duke said at the same conference, citing lost tax-revenue and the cost of demolition.
Among the fallout from the housing bust, the many abandoned properties inflict heavy costs on the wider community which may warrant government aid to ease the problem, she argued.
“In order to see the robust economic recovery we all want, we need to deal effectively with the large volume of vacant and distressed properties throughout the country,” said Duke, one of the seven presidentially appointed Fed governors who have permanent votes on monetary policy.
Although unsold home inventory levels have declined as real estate has picked up, the number of abandoned homes remains stubbornly high, she noted.
NEW YORK (Reuters) – (By Jonathan Spicer and Leah Schnurr; Additional reporting by Alister Bull in Washington; Editing by Neil Stempleman)