Bernanke doesn't see much hope for housing. The subprime crisis is likely to weigh down the housing market right the way through 2007 until 2008. However, he doesn't think that the housing sector will have any "significant spillovers" into the real economy.
A simple re-examination of the last few years suggests that he might be wrong on that one. When the housing market was booming, it pulled the US economy up with it. Now that the housing market is sliding into a hole, there is every reason that it will take the rest of the economy with it.
May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said a tightening in sub-prime mortgage standards will hurt the U.S. housing market and foreclosures will rise through 2008.
"Curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters," Bernanke said at a conference in Chicago today. "We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets."
The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system," Bernanke said.
Fed officials this year have cited the housing recession as a main risk to growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Former Fed chief Alan Greenspan also said that subprime problems aren't spreading to lower-risk loans.
Blaming the Fed
Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement during the record $2.8 trillion mortgage boom between 2004 and 2006. The Fed didn't publicly rebuke any bank for failing to follow up on guidance on lending practices in the period. Regulators could have "done more sooner," Roger Cole, the Fed's chief bank supervisor told legislators in March.
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