2010 News Releases

For immediate release: December 21, 2010

No Perfect Solution to U.S. Housing Crisis, Says Dallas Fed's Economic Letter

DALLAS—Home price gains from earlier this year will likely be reversed in the absence of homebuyer incentive programs and as mortgage modifications reach a saturation point, according to the latest issue of the Federal Reserve Bank of Dallas’ Economic Letter.

Economic Letter can be found at: http://dallasfed.org/research/eclett/2010/el1014.html

In “The Fallacy of a Pain-Free Path to a Healthy Housing Market,” Danielle DiMartino Booth and David Luttrell say U.S. home prices cannot escape the pressure exerted by oversupply.

Absent intervention in the mortgage market, modest home price declines could be allowed to resume until home inventories clear, the authors state.

New-home inventories—a key indicator—are at a 42-year low and still represent an 8.6 month supply, the authors say. An inventory of five to six months suggests a balanced market, so home prices tend to decline until that level is achieved.

“Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress,” they write.

The housing crisis, now entering its fifth year, presents policymakers with a formidable challenge as they struggle to craft an economic recovery, the authors note.

“Usually a driver of economic recoveries, the housing market is foundering as an engine of growth,” they say.

DiMartino Booth is a financial analyst and Luttrell is a research analyst in the research department of the Federal Reserve Bank of Dallas.

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Media contact:
Alexander Johnson
Phone: (214) 922-5288
e-mail: alexander.johnson@dal.frb.org

 

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