Wednesday, June 6, 2007

Bernanke: lending standards will “restrain” housing

Ben S. Bernanke, Federal Reserve Chairman, said that tightening lending standards will impact the demand for housing for longer than expected. Let’s say the initial forecasts most authorities issued were a little too optimistic to begin with. Bernanke believes “additional measures” will be required to combat fraud and abusive lending, but the Fed should be careful “not to suppress responsible lending or eliminate financing opportunities for subprime borrowers”. Fine, now we’d like to see them actually do it. Some economists have warned against additional regulation, because the market will “correct itself” anyway. Indeed the Fed is often being blamed for causing the current situation by keeping rates low for too long, so could they exacerbate the situation by intervening now?

Although Bernanke believes trouble in the housing sector has not spilled over to the larger economy, he forecasts “moderate” growth for the coming months. Job growth, manufacturing and personal spending are doing well, but some economists fear this may not last for much longer.

Rising delinquencies and foreclosures on subprime mortgages contribute to rising inventories of unsold houses, which results in declines in home prices and new construction. According to Bernanke, “the slowdown in residential construction” will likely “remain a drag on economic growth”, but it is “difficult to quantify” the impact. Knowing that housing accounts for nearly a quarter of annual economic growth, I believe no one would like to have to “quantify” the worst-case scenario.

The word “recession” is being pronounced more and more often, and with the housing slump extending for longer than expected, it seems only a question of time before the consequences of problems in the Real Estate industry are felt in the larger economy. A recession seems unlikely, but so does significant economic growth in 2007. Perhaps the Fed will deal with the problem?

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