The U.S. Housing Market’s Road to Recovery

IMF Blog, August 1, 2013

Source details

Author: Jarkko Turunen
Date: August 1, 2013
Context: One-year reassessment of the U.S. housing market recovery and its implications for private domestic demand and economic growth.
Language option noted: (Version in Español)

House prices have rebounded sharply and are currently about 7-12 percent above their level a year ago.
Home sales increased by more than 15 percent over the same time period.
Fewer homeowners are “underwater” (owe more on their mortgages than their houses are worth) or are behind on their mortgage payments.
Fewer houses are entering foreclosure.
Mortgage refinancing activity increased after policy expansions (notably HARP) but has fallen sharply in the past few weeks following a recent rise in mortgage rates.
Despite recent increases, house prices nationally remain well below their pre-crisis level—about 20 percent by some measures.

Monetary policy:
- Highly accommodative monetary policy, including Federal Reserve purchases of mortgage-backed securities, has supported the housing revival.
- Lower mortgage rates increased mortgage refinancing, reducing monthly mortgage payments and supporting private consumption.
- Lower returns on financial assets, such as long-term bonds, have made real estate investment more attractive.
Mortgage finance policies:
- Programs such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP) boosted refinancing and helped reduce the weight of the shadow inventory on home prices.
- After an expansion of HARP, HARP refinancing activity increased last year.
- Ongoing efforts aim to increase public awareness of these programs and to streamline loan modification processes.
- Recent policy initiatives have aimed at strengthening mortgage underwriting standards to contribute to a more sustainable recovery.

Outlook:
- The housing recovery is likely to continue, but the speed is difficult to predict.
- Recent data have raised concerns about sustainability.
Interest rate risk:
- The sharp increase in mortgage rates since May has raised concerns about a potential bump on the road to recovery, with higher rates potentially reducing demand for housing and dampening house price growth.
- There is little hard data to evaluate the impact on the housing market thus far—while mortgage refinancing activity has fallen sharply in the past few weeks, other recent housing indicators have remained relatively upbeat.
- Mortgage rates remain close to their historical lows, and housing affordability is high, even after the recent increase in rates.
Price dynamics:
- Double-digit house price increases over the last few months have caused concerns about a new bubble; these concerns are characterized as premature.
- Price increases have been broad-based nationally but strongest in regions that experienced the largest declines, suggesting prices are still catching up after the collapse.

Monetary policy:
- Maintain highly accommodative monetary policy where appropriate.
- Use effective communication and careful timing of normalization of monetary policy to provide the right conditions for continued recovery.
Regulatory and market structure measures:
- Expeditiously complete regulations requiring banks to retain part of mortgage risk on their balance sheet.
- Address remaining frictions in the housing market.
- Continue efforts to gradually reduce the footprint of the government-sponsored enterprises (such as Fannie Mae and Freddie Mac), which currently account for nearly all issuance of mortgage-backed securities.
- Consider additional measures, including an early adoption of a fully articulated medium-term reform strategy for these enterprises.

Source: The U.S. Housing Market’s Road to Recovery, Jarkko Turunen, August 1, 2013