For immediate release: November 15, 2007
Housing Market’s Adjustment Could Be Prolonged, Says Dallas Fed’s Economic Letter
DALLAS—The housing market’s adjustment to tighter lending standards is likely to be prolonged, according to the November issue of the Federal Reserve Bank of Dallas'Economic Letter.
In "The Rise and Fall of Subprime Mortgages," economics writer Danielle DiMartino and vice president and senior policy advisor John V. Duca examine how financial innovations and overoptimistic views of default risk led to an easing of credit standards. This, in turn, sparked a sharp rise in subprime lending and increased housing activity earlier in the decade.
Much of these gains reversed after disappointing increases in subprime loan problems subsequently triggered a tightening of credit standards. The resulting declines in home sales and slower home price gains have contributed to a mounting number of unsold homes, the authors find.
“The muted outlook for home-price appreciation, coupled with the resetting of many nonprime interest rates, suggests foreclosures will increase for some time,” DiMartino and Duca write.
The sharp downturn in home-price appreciation may also dampen consumer spending growth, an effect that may worsen if the pullback in mortgage availability limits people’s ability to borrow against their homes, the authors state.
Even though recent financial market turmoil will probably add to the housing slowdown, there are mitigating factors, according to DiMartino and Duca. In particular, monetary policy actions can help cushion the impact of weaker housing markets by helping bolster net exports and business investment.
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