Interest Rate Roundup

Friday, August 31, 2007

Some thoughts on Bernanke and the FHA bailout plan

So now we've had some time to read the speech from Fed Chairman Ben Bernanke, as well as review the official announcement of the "FHASecure" plan. There are a lot of details to sort out, and we'll learn a lot more about the potential impact of FHA reform on the mortgage industry over time. My sense, though, is that policymakers and politicians are going to have to do a lot more if they want to ameliorate the pain from the housing and mortgage bust.

The reason: The underlying market is still in very bad shape. Existing home sales have dropped about 20% from their peak. New home sales have declined 37%. The inventory of existing homes for sale hit a record high of 4.59 million units in July, and new home inventory is also sky high.

Median home prices, as measured by the National Association of Realtors, have dropped from year-ago levels for a record 12 months in a row. Separately, research firms S&P and Case-Shiller say prices dropped 3.2% in the second quarter, the biggest decline since they started collecting data in 1987. A home builder optimism index just fell to its lowest level since 1991, and a measure of home construction activity just hit to a 10-year low.

In other words, it won't be easy to "solve" the housing problem. This paper (warning: large PDF link) should help shed more light on my views of the market and potential reforms.


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