A Problem Lasting Tooo Looong
Fed officials now expect the housing slump to last longer than first thought
The effect of changes in home values on consumer spending remains an open question and would be a fruitful field for academic research, said Fed chief Ben Bernanke. While there is some research that suggests that a drop in home values may effect spending by more than conventional wisdom, there is no conclusive evidence one way or the other, Bernanke said. “I do not think we know at this point whether, in the case of households, these effects are quantitatively significant in the aggregate,” Bernanke said. “Certainly, these issues seem worthy of further study,” he said. Concern over the financial condition of homeowners might be a factor in the Federal Reserve’s interest rate deliberations.
Ever since the housing market slumped, economists have been debating whether a hypothetical nationwide drop in home prices would damage economic growth. The latest government research by the Office of Federal Housing Enterprise Oversight showed that U.S home prices increased 0.5% in the first quarter, the slowest quarter-to-quarter price gain in 10 years. But a private research report, the S&P/Case-Shiller price index - which is computed in a similar way but which also includes homes with mortgages above $417,000 - showed prices falling 1.4% in the past year. Many homebuyers took advantage of the strong housing market earlier in the decade to essentially use the value of their homes as a piggy-bank through mortgage equity withdrawals or MEW. This bolstered consumer spending. Economists continue to debate whether the withdrawal of MEW would dampen spending.
At any rate, so far, the weak housing market has not led to consumer spending to decline. But Fed officials now expect the housing slump to last longer than first thought.In some countries, like the United Kingdom, most mortgages have adjustable rates and changes in short-term interest rates have an immediate effect on household cash flows, stated Bernanke.
