Yellen has scant power to relieve housing slowdown
The hesitant housing recovery has surprised and concerned Federal Reserve chair Janet Yellen and her colleagues at the central bank. It's not clear how much they can do about it.
While the industry is rebounding from a weather-ravaged first quarter, the pickup will probably fall short of previous projections, according to economists at Goldman Sachs Group Inc. of New York and Macroeconomic Advisers L.L.C. in St. Louis. As a result, they trimmed their forecasts for economic growth in the second half of 2014 to about 3.25 percent from 3.5 percent.
"Housing is a growing worry," said Ben Herzon, Macroeconomic Advisers' senior economist.
Yellen and many of her colleagues agree. The Fed chair flagged the industry as a risk to the outlook, in testimony May 7 to Congress, while Federal Reserve Bank of New York president William C. Dudley said last week that he had been surprised by how weak the industry had been recently. He added that he still expected gross domestic product to "get back on a roughly 3 percent growth trajectory" after stalling in the first quarter.
The trouble from the Fed's perspective is that many of the forces holding housing back are outside of its control. While the Fed can influence mortgage rates through its conduct of monetary policy, it can't do much, if anything, to counteract the other causes of faltering demand: lagging household formation, stingy lenders, and wary borrowers.
"Mortgage financing is extremely tight," said Ellen Zentner, senior economist at Morgan Stanley in New York. "And that's not something the Fed can manipulate."
The Fed's ability to affect the supply of housing is even more limited. Builders are complaining about rising costs and an increasing difficulty in hiring skilled workers. They're also concentrating on developing bigger, higher-priced projects rather than on the starter homes more buyers can afford. And they, too, are plagued by tight credit.
Fed policymakers have been repeatedly frustrated by their inability to engineer a full-fledged recovery of housing through their easy-money policies. In 2012, then-Chairman Ben S. Bernanke even went so far as to send a central-bank study on the housing market to Congress, outlining steps that lawmakers could take to revive the industry. Senate Republicans promptly rebuked the Fed for overstepping its role by making policy recommendations to Congress.
Economists inside and outside the Fed had expected housing to take a hit from the rise in mortgage rates last year and the severe weather over the winter. What has surprised them is the steepness of the decline and its persistence.
That has led them to look for other reasons to explain the weakness. At their last meeting, April 29 and 30, Fed policymakers discussed a number of potential causes, according to the minutes of the gathering, released last week. They included "higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input-cost pressures, or a shortage in the supply of available lots."