Fed Chair Janet Yellen has expressed concern about a slowing housing recovery that could pose a risk to the overall economic outlook, but there is very little the regulator can do other than influence mortgage rates, Bloomberg reported May 28.
Adjusting rates, however, has no impact on other factors contributing to a sluggish housing sector, including lagging household formation and cautious lenders and borrowers.
“Mortgage financing is extremely tight,” Ellen Zentner, senior economist at Morgan Stanley, told Bloomberg. “And that’s not something the Fed can manipulate.”
Much of the downturn in the first quarter was due to bad weather, but the pace of home sales is likely to fall short of earlier projections. Economists at Goldman Sachs Group in New York and at research firm Macroeconomic Advisers in St. Louis have both lowered their economic growth forecasts for the second half of 2014 from 3.5 percent to 3.25 percent.
Sales of previously owned homes rose for the first time this year in April but were still about 7 percent lower than a year earlier, according to the National Association of Realtors. And new single-family home sales in April were 4.2 percent below the same point a year ago.
Fannie Mae Vice President Mark Palim thinks housing construction will pick up in the months ahead and raise gross domestic product by 0.2 percent this year, only slightly off from its 0.33 percent contribution a year ago — but that’s still well below what economists expected, Bloomberg reported.
Cleveland Fed Vice President Edward Knotek and Economist Saeed Zaman both said that rising mortgage rates have influenced the slowdown in housing recovery, and they noted that even a modest rate increase to around 5.5 percent next year — still historically low — could continue to hold back the industry.
However, David Crowe, chief economist at the National Association of Home Builders, told Bloomberg that mortgage rates are not the issue. He said the problem is credit availability.
The Mortgage Bankers Association reported that the credit availability index stood at 113.8 in April, up from a year earlier, but still well below the 414.8 level where it stood at 2004 before the housing boom, Bloomberg reported.
If credit access is the problem, then Federal Housing Finance Agency Director Mel Watt may be able to help. On May 13, he announced new rules to reduce the risk that banks would have to repurchase bad loans from Fannie and Freddie. He hopes the changes will lead banks to slightly relax credit standards.