I unfortunately can envision no quick or easy solutions for the problems still afflicting the housing market. Even once it begins to take hold, recovery in the housing market likely will be a long, drawn-out process.

But suppose for a moment that we do accept the claim that housing is somehow critical for an economic turnaround. I’m not sure how, if at all, it would affect my thinking as a monetary policymaker. The Federal Reserve can only influence the housing market by manipulating interest rates. But there is little evidence that interest rates have a big influence on housing starts. For example, in a 2007 National Bureau of Economic Research paper on housing and the business cycle, UCLA professor Edward Leamer estimated a relationship between current housing starts, past housing starts, and interest rates. The Minneapolis Fed banking studies group has used Leamer’s estimates to calculate the impact of a 100-basis-point permanent decrease in 10-year Treasury yields on housing starts one year from now. The group has found that housing starts would be 11 percent higher with the rate cut than without it. This effect would be barely noticeable, given that housing starts need to nearly triple to get back to their normal level.

Looking ahead, uncertainty about the outlook is greater than usual, though probably not greater than is typical for this phase of a business slowdown. It strikes me as reasonable to expect the U.S. economy to regain positive momentum sometime in 2009, for several reasons. First, monetary policy is now quite stimulative. Second, the energy and commodity price shocks that dampened economic activity earlier this year have subsided already or are in the process of doing so. And as I’ve mentioned, the drag from housing seems likely to lessen in the next year, and in fact, I would be surprised if we don’t see a bottom in housing construction sometime in 2009. This is the third straight year, however, that I’ve been expecting a bottom in the housing market in the middle of next year, so my outlook is tempered by more than the usual amount of humility.

Any stabilization in the housing sector should provide a sizable stimulus to overall growth, all else equal...By the first half of 2009, homebuilders will probably have worked off the bulk of their excess inventories of unsold new homes, and, after three years, we will finally see an end to the drag from this sector.

Most forecasters do not expect to see a bottom in housing construction until early 2009. By then, homebuilders will have probably worked off the bulk of their excess inventories of unsold new homes. However, the inventory of existing homes on the market remains near record-high levels, and it seems likely that it will take longer to work off that inventory. Sales of new and previously sold single-family homes appear to have stabilized over the past few months. It seems unlikely that sales would have stabilized if buyers were still expecting steep price declines.

The housing market still has some way to go.  We see relatively few signs that house prices have bottomed out.

There are some very tentative signs of improvement in existing home sales, and my expectation is that housing will be less of a drag on growth as we move through 2009.

Most observers are very hesitant about calling a bottom in housing construction, sales or prices, a hesitancy that I share. And even if housing market activity does manage to bottom out later this year, it is likely that any recovery would be exceedingly slow.

 Most lenders have eliminated many riskier innovative mortgage products from their line-ups, which makes sense given the recent performance of such products, but which makes homeownership more costly than it was during the boom. Thus, most observers are very hesitant about calling a bottom in housing construction, sales or prices. And even if housing market activity does manage to bottom out later this year, it is likely that any recovery would be exceedingly slow.

The extent of eventual housing problems is highly dependent on the outlook for the economy and the future path of housing prices.  Fortunately, aggressive monetary and fiscal policy actions have been taken to help mitigate some of the downside risk.  These policies will likely result in some pick up in economic activity in the second half of this year, which should help to stabilize the housing market.

My central tendency forecast is for the majority of markets to stabilize toward the end of this year and the beginning of next year, though in some regions it will take much more time.

From Q&A as reported by Market News International and Reuters

[The mortgage crisis] is bad and it's getting worse.

As reported by Bloomberg News

The demand for housing is not likely to rebound substantially for a while after this episode, but the drag on growth from declining activity and prices in the housing market will ebb as excess inventories are worked off and affordability improves.

The bottom line is that construction spending and house prices seem likely to continue to decline well into 2009.

 In fact, the contraction in spending on housing construction subtracted a full percentage point from U.S. real GDP growth last year, and nearly as much the year before. It seems likely that this sector will be a major drag on the overall economy through the end of this year and into 2009.

Until recently, the deflating housing bubble had not spilled over to the rest of the economy. But now it has. It appears that growth in consumption and business investment spending has slowed markedly after years of robust performance, and, as a result, the economy has all but stalled and could even contract over the first half of the year.

The factors weighing down consumer spending go beyond the effects of the credit crunch and the falling house prices. Consumers also face constraints due to the declines in the stock market, which have diminished their wealth. Furthermore, energy, food, and other commodity prices have risen sharply in recent years, essentially “taxing” their incomes. Finally, and very importantly, labor markets have weakened.