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U.S. Stimulus Needs Housing Effort, New York Fed’s Tracy Says

September 27, 2011

Sept. 27 (Bloomberg) -- Any success for government efforts to stimulate the economy will be limited unless policies are combined with steps to aid the housing market, according to Federal Reserve Bank of New York economist Joseph Tracy.

“We need to fold in some pretty serious housing policies at the same time, not just to get housing going, but to get the full benefit of all these policies,” Tracy said today at a conference hosted by the New York State Society of Certified Public Accountants. “That would be very complementary.”

The housing market is still a drag on the economy even as the Fed has kept its target rate for overnight loans between banks at a record low since December 2008 and plans to extend the maturities of its $2.64 trillion of securities holdings to tamp down longer-term borrowing costs. President Barack Obama has proposed a $447 billion plan that includes infrastructure spending and payroll tax cuts to reduce the 9.1 percent unemployment rate.

“If you leave housing alone, that’s going to limit the scope for these other policies to have their full benefit,” Tracy said. Following the financial crisis, policy makers “didn’t completely understand the headwinds that the housing sector was generating, and so should have directed more attention to trying to assist the healing in housing.”

Refinancing Pace

Stimulus through mortgage refinancing, which can lower borrowing costs for homeowers, has been stymied in part by the declines in home prices relative to the outstanding loan balances and higher rates of unemployment.

While U.S. mortgage-refinancing applications have climbed 71 percent from this year’s low in February, depressed home prices and tougher loan standards have limited refinancings to 57 percent below the record in 2003, according to Mortgage Bankers Association data. The average rate on a typical 30-year fixed loan fell to an all-time low 4.09 percent for each of last two weeks, compared with as low as 5.21 percent in 2003, Freddie Mac data show.

The S&P/Case-Shiller index of property values in 20 cities fell 4.1 percent in July from a year earlier, compared with a revised 4.4 percent drop in the 12 months to June, the group said today in New York.

“The enormous supply overhang of existing homes, particularly factoring in all those in foreclosure or soon to be, promises to keep pressure on prices for some time,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a note to clients. “We look for further declines to be registered in the quarters ahead, although in all likelihood the rate of deterioration will be nowhere near as steep as that recorded earlier.”

--With assistance from Jody Shenn in New York and Robert Willis in Washington. Editor: Paul Cox, Greg Storey

To contact the reporter on this story: John Detrixhe in New York at

To contact the editor responsible for this story: Dave Liedtka at

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