The following are excerpts from Fed Governor Mishkin relating to the Real Estate Market and Sub Prime Lending.
Remarks by Governor Frederic S. Mishkin
At The Levy Economics Institute of Bard College, Annandale-on-Hudson, New
York, April 20, 2007
Turning first to the prospects for economic activity, two particular areas have emerged
recently that have heightened uncertainty about the near-term outlook. The first area is
housing: Where do we stand in the housing adjustment, and what effect will recent
developments in subprime lending have on that adjustment? The second area is business
investment: How should we interpret the incoming data showing that business spending
on equipment and software has been weak this year?
Regarding the housing adjustment, new single-family homes were started at an average
annual rate of a bit under 1.2 million units in the first three months of this year--a pace
roughly one-third below the unsustainable peak in new construction reached in mid-2005.
At the beginning of the year, the ongoing cutbacks in starts of new homes, together with a
lowered but fairly steady pace of home sales, were beginning to reduce the elevated
backlog of new homes for sale. However, a further weakening in sales of new homes in
January and February reversed some of the progress in reducing those inventories. As a
result, cutbacks in new residential construction may well persist for a while.
More recently, developments in the subprime mortgage market have raised some
additional concern about near-term prospects for the housing sector. The sharp rise in
delinquencies on variable-interest-rate loans to subprime borrowers and the exit of a
number of subprime lenders from the market have led to tighter terms and standards on
such loans. While these problems have caused undeniable hardship for many families and
communities, spillovers to other segments of the mortgage market or to financial markets
in general appear to have been minimal. Variable-interest-rate loans to subprime
borrowers account for a bit less than 10 percent of all mortgages outstanding, and at this
point the expected losses are relatively small. Moreover, because most subprime
mortgages are securitized, the risks associated with these loans are spread widely. Banks
and thrift institutions that hold mortgages are well-capitalized, and exposures of
individual banks to possible subprime losses do not appear to be large. On the whole,
some borrowers may find credit more difficult to obtain, but most borrowers are not
likely to face a serious credit constraint.
Indeed, I should note some positive news for the housing sector. Sales of existing homes
strengthened a bit during January and February, and the Mortgage Bankers Association
index of applications for home purchase suggests that demand has been fairly steady
through early April. Also, mortgage rates are still at historically low levels, and
mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers
continue to show low rates of delinquency.
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