[On housing] we're pretty close to a bottom in terms of demand, but there are some risks to that outlook.

As reported by Bloomberg News

Tighter lending standards in the subprime mortgage market--together with the possibility that the well-publicized problems in this market may dissuade potentially eligible borrowers from applying--will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify.  Subprime and near-prime mortgage originations rose sharply in 2004 and 2005 and likely accounted for a large share of the increase in the number of home sales over that period.  However, originations of nonprime mortgages to purchase homes appear to have peaked in late 2005 and declined substantially since then, and by more (even in absolute terms) than prime mortgage originations.  Thus, some part of the effect on housing demand of the retrenchment in the subprime market has likely already been felt.  Moreover, indicators such as the gross issuance of new subprime and near-prime MBS suggest that the supply of nonprime mortgage credit, though reduced, has by no means evaporated.  That said, the tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead.  We are also likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets.

Growth during the first quarter of this year was held down by some factors--notably, significant declines in inventory accumulation, net exports, and federal defense spending--that seem likely to be at least partially reversed in the near term. Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected. Thus far, however, we have not seen major spillovers from housing onto other sectors of the economy. On average, over coming quarters, we expect the economy to advance at a moderate pace, close to or slightly below the economy’s trend rate of expansion.

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

More recently, some home builders have reported tentative signs of stabilization in demand, and some data—for example, applications for mortgages and sales of existing homes—are consistent with this assessment. Furthermore, conventional mortgage rates remain low by historical standards, lending support to housing demand. However, other data are weaker, such as the inventory of unsold new homes, which has increased further this year. Unless sales rebound dramatically (and unexpectedly), construction will be depressed for some time in order to reduce inventories to more desirable levels.

...After considering the various developments, including the problems in the subprime mortgage market, I expect that residential construction will stabilize as we move through 2007. However, it could be next year before we see any noticeable increases in home building.

Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels.

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

A key question for the outlook is: What will be the full extent of the housing slowdown?

The most recent data on housing have been mixed and downside risks remain...

That said, the longer-term fundamentals for housing in the U.S. remain positive. The same factors that supported the housing boom—strong productivity trends and low borrowing rates relative to historical norms—are still in place. These factors likely put a floor under how far housing will decline. So I think home building will stabilize as we move through the year, but I don't expect to see any noticeable increases, either.

The same factors that supported the housing boom—strong productivity trends, improved access to credit, and low mortgage rates relative to historical norms—are still in place. These factors likely put a floor under how far housing will decline. So I think home building will stabilize as we move through the year, but I don't expect to see any noticeable increases, either.

Currently, however, concern is growing over the increase in foreclosures.   ... [But] nontraditional mortgages have resulted in increased delinquencies because they have been used by consumers with higher risk profiles who may not fully recognize the risks inherent in these mortgages.  Some of the more exotic mortgages, which have payments that start low but can increase sharply in certain situations, may not be suitable for the average borrower.  

Home sales have steadied somewhat after falling sharply for a year or so. Considering this in combination with the continued drop in housing starts that I mentioned earlier, it is not surprising to find that inventories of unsold homes have begun to shrink. This development suggests that the process of resolving the imbalances between demand and supply in the housing market may be underway, and, as a result, we could very well see the drag on real GDP from housing construction wane later this year.

We have seen tentative signs that housing has begun to stabilize. Housing starts ticked up in November and December, new home sales increased in the fourth quarter, and applications for home-purchase mortgages have been running higher than they did last fall. And the same factors that supported the housing boom—strong productivity trends, improved access to credit, and low mortgage rates relative to historical norms—are still in place. These factors likely put a floor under how far housing will decline.

But after ticking up in November and December, housing starts declined sharply in January. These numbers can be highly volatile—especially during the winter months. Indeed, permits for home building also fell, but by a much smaller amount. But these data highlight that downside risks remain. Although demand is improving in some parts of the country, the progress is uneven. One national home builder recently reported that it has yet to see any stabilization in some Midwest markets, including Chicago and Detroit. Moreover, nationwide inventories of unsold homes remain much higher than they were a year ago. It will take some time for the excess inventory of homes to be sold. So while I think homebuilding will stabilize as we move through the year, I don't expect to see any noticeable increases, either.

Some observers think that the worst of the national housing contraction is behind us. That view may be premature, but the recent data are encouraging. Home sales no longer seem to be falling, and inventories of unsold homes have dropped a bit. And even though new homes under construction fell sharply last year following several years of strong growth, most economists expect further declines to become less steep.

By some indicators, the housing market is beginning to show signs of stabilizing. New single-family home sales rose in December, the fourth increase in the past five months, while in January the National Association of Home Builders’ housing market index—a measure of builder confidence—rose to its highest level since July 2006. Further, the four-week moving average of the Mortgage Bankers Association index of applications for home purchases has increased nicely since its trough last October. Finally, the University of Michigan’s consumer survey of home-buying conditions in January 2007 reportedly rose to its highest level since mid-2005.

The market for previously sold single-family homes may also have stabilized. Existing home sales rose a modest 0.1 percent in the fourth quarter of 2006, after declining 6.4 percent in the third quarter. Moreover, the pending home sales index reported by the National Association of Realtors turned up in January, registering its largest monthly increase since March 2004. Although the inventory of existing homes for sale, relative to sales, has also dropped over the past few months, its December level of 6.5 was still a bit above that for new homes, which stood at 5.9.

While recent data seem to point in a favorable direction, we must recognize that the housing market is not out of the woods yet. The most pressing issue for builders remains the backlog of unsold homes, at which they are chipping away, and the continued high rates of canceled orders.

In response, builders naturally began to reduce new construction. Part of this pullback was motivated by skittish households; cancellation rates, according to some large builders, reached 40 percent or more during the latter part of 2006. Although the majority of forecasters correctly anticipated softness in housing construction, the magnitude of the decline exceeded their expectations...

A special word of caution is in order concerning housing data... To an unusual degree, sales data are affected by cancellations, which occur when buyers walk away from sales contracts. In published data, cancelled sales are not subtracted from new sales to create a net sales series. Moreover, cancelled sales are not put back into the data on the inventory of unsold new homes. Anecdotal reports clearly indicate that cancellations have been material. Thus, official data overstate net sales of new homes and understate the inventory of unsold homes. Finally, favorable recent news on the inventory of existing homes for sale may well have been influenced by discouraged homeowners taking their properties off the market rather than by actual sales.