WASHINGTON -- Ben Bernanke says declines in home prices have forced many Americans to cut back sharply on spending and warns that the trend could continue to weigh on the economy for years.
The Federal Reserve chairman drew the connection between home values and consumer spending, which fuels 70 percent of economic activity, on Friday during a speech to the National Association of Home Builders in Orlando.
Bernanke says the broader economy won't fully recover until the depressed housing market turns around. People are spending less because they are stuck in "underwater" homes, which are worth less than what is owed on the mortgage. And home values are falling because of foreclosures and tight credit -- even in areas with lower unemployment.
"Recent declines in housing wealth may be reducing consumer spending between $200 billion and $375 billion per year. That reduction corresponds to lower living standards for many Americans," Bernanke said.
The Fed chairman said there's no "silver bullet" to rescue the housing market. Renting out foreclosed homes and reducing or modifying mortgages are among steps that could help.
"Low or negative equity creates additional problems for households," Bernanke said. "It reduces financial flexibility: Homeowners who are underwater on their mortgages cannot tap home equity to pay for emergency health expenses or their children's college educations.
There have been modest signs of improvement in recent months. Sales of previously occupied homes rose in the last three months. Homebuilders are more optimistic after seeing more people express interest in buying this year. And home construction picked up in the final quarter of last year, which helped housing contribute to broader economic growth.
Still, last year was the weakest for new-home sales on records dating back to 1963. Sales of previously occupied homes have also been at depressed levels. And home prices continue to fall.
Low Interest Rates Add Little Lift
The Fed issued a white paper last month that included a number of proposals to boost home sales. The paper sparked some criticism. Rep. Scott Garrett (R-N.J.) told Bernanke last week during a congressional appearance that he was taken aback that the Fed would offer unsolicited advice to Congress, putting forward proposals which Garrett said mirrored in many ways ideas being pushed by the Obama administration.
Bernanke said the Fed only wanted to provide pros and cons on various approaches, and he said Fed officials remained concerned because the weak housing sector was holding back overall growth.
The central bank has tried to help by keeping its benchmark interest rate at a record low near zero. And the Fed recently signaled that it doesn't plan to raise the rate before late 2014.
The Fed's decision to hold rates down, along with two major rounds of bond purchases, has led to lower mortgage rates.
Lower mortgage rates typically encourage more buying and refinancing.
Still, damage from the housing crisis has been so widespread that even the cheapest mortgage rates in history haven't been enough to lift home sales. And many banks have restricted lending to only those with the best credit.
After the Fed's meeting in January, Bernanke said the Fed has not ruled out a third round of bond purchases. Bernanke told the builders' group Friday that the Fed has been working to loosen tight lending standards.
"I do think that conditions are still too tight for the health of the financial system, the construction industry and our economy," Bernanke said. "As regulators, we have been very clear to the banks ... that we want them to take a balanced approach. We want them to make prudent loans and we don't want them to turn away creditworthy borrowers."
Asked about unanticipated shocks that could set back economic growth, Bernanke cited the European debt crisis and continued budget uncertainties in Washington.
"We will be paying close attention to what is happening and hoping that our economy is developing enough steam so that it will be able to continue to recover even if there are some bumps along the road," Bernanke said.
Bernanke's speech came a day after the government announced it had reached a landmark $25 billion deal with the nation's biggest mortgage lenders over foreclosure abuses that had occurred after the nation's housing bubble burst in the middle of the last decade.
That deal will require five of the largest banks to reduce loans for about 1 million households at risk of foreclosure. The lenders will also send checks of $2,000 to about 750,000 American who were improperly foreclosed on.
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Rebounding Real Estate Markets: Top 10 Turnaround Towns
Bernanke: Housing Still Hurting Consumer Spending
Median List Price Appreciation: 17.79 percent
Median Age of Inventory: -16.18 percent
Inventory Change: -29.25 percent
Home Price: $2.999 million
Sq. Ft.: 5,123
After slipping out of Realtor.com's top 10 rankings for the third quarter of last year, Punta Gorda has reclaimed status as a town in the vanguard of real estate recovery. Home prices are reportedly just beginning to trend upward. But they still have a long way to go: home prices in town are 56.2 percent lower than they were in 2006, at the peak of the housing boom.
Median List Price Appreciation: 9.09 percent
Median Age of Inventory: -28.89 percent
Inventory Change: -35.28 percent
At 11 percent, the Lakeland-Winter area has the highest rate of unemployment on Realtor.com's top 10. But the real estate market seems to be another story. Realtor.com says that the area was the fourth-most-searched spot by users of their listing service. Distressed home sales have fallen significantly from last year as well.
Home Price: $1.3 million
Sq. Ft.: 7,813
The local market may be on the road to recovery, but distressed home sales still are hindering the market. This French mansion is selling by way of short sale.
Median List Price Appreciation: 7.84 percent
Median Age of Inventory: -35.71 percent
Inventory Change: -41.63 percent
Home Price: $5 million
Sq. Ft.: 8,700
Sale prices in this sultry town have risen 18 percent year-over-year, as of November, quite an encouraging sign for the local market. Meanwhile, unemployment is shrinking. The rate fell to 9.4 percent in November.
This Mediterranean may have just seen its price slashed, but with a $5 million ask, it'll still cost you a pretty penny.
Median List Price Appreciation: 13.38 percent
Median Age of Inventory: -13.64 percent
Inventory Change: -35.94 percent
Home Price: $19.9 million
Sq. Ft.: 8,226
Naples finds its way onto Realtor.com's list for the first time this quarter, thanks, in part, to its housing market's 13.64 percent decline in median age inventory and 13.38 increase in median list price.
Naples offers its fair share of uber-luxury homes. This waterfront mansion, at nearly $20 million, costs $2,419 per square foot.
Pictured here is a dining room of the home (we're guessing there's probably another one considering the place is 8,000 square feet). The elaborately decorated room features what appears to be a flying saucer. Maybe it can beam up the filet mignon.
Median List Price Appreciation: 13.77 percent
Median Age of Inventory: -23.42 percent
Inventory Change: -39.66 percent
Home Price: $1.5 million
Sq. Ft.: 4,875
A drop in foreclosures in this city shrank its year-over-year for-sale inventory by a whopping 40 percent as of last year's fourth quarter. The city also enjoys the benefit of an unemployment rate that is lower than the national average.
Median List Price Appreciation: 10.78 percent
Median Age of Inventory: -26.57 percent
Inventory Change: -31.01 percent
Home Price: $12.5 million
Sq. Ft.: 7,194
In Sarasota, home sales jumped 17 percent last year while median list prices defied the national downward price decline by ticking up 2 percent. Realtor.com goes so far as to suggest that the market may have graduated to "seller's market" status, unthinkable in most housing markets across the country.
Thrust out into the Gulf of Mexico, this jaw-dropping manse practically commands its own square-shaped peninsula. But apparently personal peninsulas don't come cheap in Sarasota: This property is listed to the tune of $12.5 million.
Pictured here is the home's covered dock that parks at least two boats. Inside the home you'll find an exercise room, library and attached "oversized" verandas. Other outdoor amenities include an expansive pool and shuffleboard courts.
Median List Price Appreciation: 31.27 percent
Median Age of Inventory: -17.60 percent
Inventory Change: -35.31 percent
Price: $8.7 million
Sq. Ft.: 13,723
The Fort Myers-Cape Coral area continues to chug along the path to recovery with its median sales price zooming upward by 20 percent last year. But there's more to brag about: The area experienced the highest year-over-year increase in median list price for the fourth quarter -- 31.27 percent.
Median List Price Appreciation: 8.22 percent
Median Age of Inventory: -36.52 percent
Inventory Change: -44.02 percent
Home Price: $3.99 million
Sq. Ft.: 8,676
Year-over-year inventory plummeted by 44 percent in Orlando in the fourth quarter of last year, while list prices rose 8.22 percent. Both movements point toward a market that is truly beginning to right itself.
Fit for the big-swinging, cigar-smoking mogul, this luxury home, which recently had its price cut, puts you close to the links.
Median List Price Appreciation: 15.38 percent
Median Age of Inventory: -27.47 percent
Inventory Change: -48.10 percent
Home Price: $5.995 million
Sq. Ft.: 11,039
An area that had its housing market severely bruised by the foreclosure crisis, the Phoenix-Mesa area is mounting a recovery in a big way. While residents continue to file for foreclosure at a rate above the national average, the glut of cheap homes idling on the market has lured bargain-hunters. The area's relatively low unemployment rate of 7.7 percent also will work in its housing market's favor.
Median List Price Appreciation: 28.57 percent
Median Age of Inventory: -30.89 percent
Inventory Change: -51.44 percent
Home Price: $6 million
Sq. Ft.: 3,870
Buy in the city where the heat is on -- all night on the beach 'cause the housing slump's gone! Welcome to Miami (beinvenido a Miami)!
Miami leads the pack of cities building toward a recovery. Existing home sales in the Miami area leaped 51 percent in the third quarter compared to a year ago. Meanwhile, inventory shrank by half. Realtor.com suggests that much of the improvement is attributable to strong foreign activity in the market.
This luxury apartment may soon be the trophy home of some foreign magnate. According to Realtor.com, in May of last year, international buyers purchased about 60 percent of existing houses and condos and 90 percent of the newly built homes in Miami.