Rosengren, Eric

A critical factor in the size of losses, and whether balance sheet constraints become more widespread, is the extent to which housing prices fall. Unfortunately, we have little historical precedent for sustained declines in national housing prices, which makes it difficult to forecast future home prices. However, one of the significant downside risks to the economy is that further declines in housing prices could depress residential investment, reduce consumer spending, generate elevated foreclosures, and contribute to financial instability. Taking appropriate monetary, regulatory, and fiscal actions to mitigate this risk seems prudent.