Federal Reserve Board Governor Elizabeth Duke Friday said that in the wake of the U.S. housing crisis, certain areas with high residential-property vacancy rates will require government intervention to heal.

An "unprecedented volume of foreclosures" has "left us with an extraordinary level of vacant and distressed properties," Duke told a luncheon audience at a distressed residential real estate conference hosted by the Federal Reserve Bank of New York.

"In order to see the robust economic recovery we all want, we need to deal effectively with the large volume of vacant and distressed properties throughout the country," she said.

"Certainly, different housing markets will recover in different ways and at different paces," Duke added. "In some areas, the private market will lead the way, while in others, government will have to use precious resources wisely to catalyze recovery."

For its part, "I can assure you the Federal Reserve System will continue to support recovery through the use of all its policy tools and research capacity," she said.

The costs of such solutions must be weighed against the "costs of doing nothing," she said, and pointed to demolition and conversion costs that taxpayers may ultimately bear.

But Duke also noted "signs of improvement" in U.S. housing conditions this year, including rising home prices that have moved a "noticeable number of underwater households ... from negative equity to positive equity." Still, she cautioned that "these struggling high-vacancy areas provide evidence of the hard work that remains."

For-sale vacancies, however, are only one part of total vacancy volume, she said.

"Many vacant homes are not on the market at all," Duke said, and noted those in the foreclosure process and bank-owned homes not yet for sale, as well as those vacant for reasons unrelated to foreclosure.

"The stock of non-seasonal homes held off market is nearly two and a half times as large as the for-sale vacant stock," she said. This component of vacancies has not declined "at all" in the past year, she added.

The Fed governor said there is "no one-size-fits-all" solution to the vacancy conundrum. Neighborhood stabilization efforts must take different forms.

In what she called "housing boom" areas - metropolitan areas where there are long-term vacancies among relatively newly built homes, and where median incomes, home values and education levels are higher - a useful solution could include conversions to rental units, especially as the rental market tightens. In these areas, notably Phoenix, there are signs of investor purchases that are resulting in more rental stock, she said.

But Duke cautioned against "aggressive" investor activity that could "crowd out potential homeowners, especially low- to moderate-income households." She praised government programs that offer a "first look" window of time during which only non-investors can bid on properties.

Turning to Baltimore, a "low demand" areas of high long-term vacancy rates, Duke cheered the city's initiative that includes an array of approaches, including "targeted housing code enforcement to foster redevelopment," homebuyer incentives and, in certain hardest-hit communities, demolition.

She also said that tighter, more prudent mortgage-lending standards should not "unnecessarily dampen the housing recovery and disproportionately affect creditworthy low-income and minority homebuyers."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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