WASHINGTON - The U.S. housing market remains "severely" out of balance, hampering economic recovery, and while a longer-term policy needs to be defined, balancing supply and demand is an "immediate priority," Elizabeth Duke, member of the Board of Governors of the Federal Reserve, said Thursday.
With at least one million properties likely to pass through real estate owned inventory this year and an additional million in both 2012 and 2013, "REO properties are weighing heavily on the market for owner-occupied house," Duke noted in prepared remarks to the Federal Reserve Board Policy Forum dedicated to “The Housing Market Going Forward: Lessons Learned from the Recent Crisis.”
So addressing the REO inventory might be a good way to help rebalance the housing market, she said.
This is a focus of the administration, which on August 10 issued a request for information "to solicit ideas for sales, joint ventures, or other strategies to augment and enhance Real Estate-Owned (REO) asset disposition programs of Fannie Mae and Freddie Mac (the Enterprises) and the Federal Housing Administration (FHA)."
When issuing the request, the Federal Housing Finance Agency (FHFA), the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development said they were "exploring alternatives that will facilitate the current and future disposition of REO, improve loss recoveries compared to individual retail REO sales, help stabilize neighborhoods and local home values, and where feasible and appropriate, improve the supply of rental housing."
While Duke stressed "supervisors encourage sales as the primary disposition tool," she added that "conditions are unusual enough that it might also make economic sense to clarify existing expectations to recognize that in some cases converting a portion of residential REO to rental may be a reasonable option for financial institutions."
"Such conversions might also be in the best interests of lienholders and guarantors if recoveries from renting out properties exceed those from outright sales," she argued. "Over time, as financing conditions ease and the number of REO properties to be sold declines, the share of properties sold to owner-occupants and sold to investors for rental will adjust commensurately."
Conversions could also benefit the owner-occupied housing market, which faced weak demand, as high unemployment and tight credit conditions make access to credit difficult.
Even the rental market -- where demand is high and where "conditions supporting rental demand" are likely to "persist for some time" -- could benefit from this option.
Clearly, "We need to deal with the unprecedented number of loans in or still entering the foreclosure pipeline, the disposition of properties acquired through foreclosure, and the effect of a high percentage of distressed sales on home prices," Duke urged.
"Regardless of how we got here, we, as a nation, currently have a housing market that is so severely out of balance that it is hampering our economic recovery," she added.
She stressed the combination of high inventories of home for sales and the high proportion of distressed sales suggest additional downward pressure on house prices.
So converting the outstanding REO to rental would be a good option, provided rental programs are cost effective.
Longer term, the housing reform also needs to be addressed, Duke said, adding the role of the government must be defined in addition to a greater private sector involvement.
But for now, "An immediate priority is balancing supply and demand in a market overwhelmed by financially stressed homeowners, tight credit conditions, and an unusually high number of foreclosed homes."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See
