Amazing insight at the Fed

After being asleep at the switch for so long, is the Federal Reserve finally starting to realize the largest threat posed by the bursting of the housing bubble?

Maybe.

Courtesy of the always interesting WSJ Real Time Economics blog comes this report on a speech made yesterday by Federal Reserve Bank of Boston president Eric Rosengren in which the impact of falling home prices on consumer spending is considered.

Further declines in housing prices could more significantly hurt consumer spending, a Fed official said Wednesday.

“The effect of the problems in housing on consumption has been muted to date,” Federal Reserve Bank of Boston president Eric Rosengren told the Portland (Maine) Regional Chamber of Commerce. However, “further and more widespread deterioration in housing prices would increase the risk of a more adverse impact on consumption.”
...
Mr. Rosengren said the surge in delinquencies on subprime loans – those to customers with generally weak credit histories or lower income – has been driven by faulty assumptions that housing prices would continue to rise nationally, when in fact by some measures they are falling. Flat to falling prices have made it hard for borrowers to refinance. Moreover, many loans were made by brokers who lowered underwriting standards in order to boost volumes, rather than by deposit-taking banks.

But he said research by his bank shows that subprime mortgages have nonetheless had important regional benefits. Almost 90% of subprime mortgages made between 1999 and 2004 were “prepaid” within three years, he said. Since prepayment occurs with a sale or refinancing, “it is plausible that many borrowers who purchased homes with subprime products did benefit from the appreciation of home prices in New England that occurred over the last decade.” (Some of the mortgages that were refinanced in that period may have subsequently gone into foreclosure.)

Uh. Gee. Short term interest rates just started rising in 2004 - do you have any more recent data on the performance of subprime loans?

The first commenter put is best asking, "What is this guy smoking?"

Elsewhere online in the WSJ today, in their Developments blog, comes this keen insight by one Danilo Pelletiere, research director at the National Low Income Housing Coalition in Washington.

"If you weren’t owning in 2006, there’s a reason" and that reason wasn’t pretty. “The stigma of renting was raised to a really high level. If you were renting you were a loser.”

Is that what things were really like last year?

That the entire world, save for a few of us "renters by choice" out here in the blogosphere and a couple of brave souls like Dean Baker at the CEPR (Center for Economic and Policy Research ) were viewed as losers?

I can't tell you how many people just gave me a blank stare over the last few years when I'd bring up the possibility that a) home prices might not go up forever and, more importantly, b) they might decline significantly.

They probably felt sorry for me.