Wednesday, March 28, 2007

Bernanke on Housing

From his Congressional Statement:

The principal source of the slowdown in economic growth that began last spring has been the substantial correction in the housing market. Following an extended boom in housing, the demand for homes began to weaken in mid-2005. By the middle of 2006, sales of both new and existing homes had fallen about 15 percent below their peak levels. Homebuilders responded to the fall in demand by sharply curtailing construction. Even so, the inventory of unsold homes has risen to levels well above recent historical norms. Because of the decline in housing demand, the pace of house-price appreciation has slowed markedly, with some markets experiencing outright price declines.

The near-term prospects for the housing market remain uncertain. Sales of new and existing homes were about flat, on balance, during the second half of last year. So far this year, sales of existing homes have held up, as have other indicators of demand such as mortgage applications for home purchase, and mortgage rates remain relatively low. However, sales of new homes have fallen, and continuing declines in starts have not yet led to meaningful reductions in the inventory of homes for sale. Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels.


Translation:

1.) Housing is the main reason why US GDP growth dropped about 2% points over the last three quarters.

2.) There are a ton of homes on the market.

3.) If demand levels remain at these levels and don't fall any further, it's going to take a long time to clear available inventory.

Therefore:

4.) Housing will remain a drag on the economy for longer than we would like.

And on top of that, inflation isn't behaving. Right now it really sucks being head of the Federal Reserve.