The Federal Reserve "remains prepared to take action as needed" to protect the U.S. economy from the fallout of the European debt crisis, Fed Chairman Ben Bernanke told lawmakers in Washington, D.C., today, but surveys show consumer sentiment may be keeping would-be homebuyers on the fence.
"The crisis in Europe has affected the U.S. economy by acting as a drag on our exports, weighing on business and consumer confidence, and pressuring U.S. financial markets and institutions," Bernanke said.
To encourage borrowing that can spur economic growth, Bernanke said the Fed has continued to keep pressure on long-term interest rates, including mortgages.
One way it’s doing that is by reinvesting principal the Fed receives from its holdings of Fannie Mae and Freddie Mac debt and mortgage-backed securities (MBS) back into agency MBS, and rolling over its maturing Treasury holdings at auction.
But the depressed housing market continues to be another "important drag" on the economic recovery, Bernanke said.
"Despite historically low mortgage rates and high levels of affordability, many prospective homebuyers cannot obtain mortgages, as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired," Bernanke said.
"At the same time, a large stock of vacant houses continues to limit incentives for the construction of new homes, and a substantial backlog of foreclosures will likely add further to the supply of vacant homes."
Bernanke said there have been a few encouraging signs in housing recently, including "some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of home prices in some areas."
But Bernanke said households and businesses still appear "quite cautious about the economy." Surveys show households "continue to rate their income prospects as relatively poor and do not expect economic conditions to improve significantly. Similarly, concerns about developments in Europe, U.S. fiscal policy, and the strength and sustainability of the recovery have left some firms hesitant to expand capacity."
A survey conducted in May by Fannie Mae and released today showed Americans are taking a "wait and see" approach about buying or selling a home," said Fannie Mae Chief Economist Doug Duncan.
"This is not surprising given their assessment that their income during the past twelve months and their personal financial expectation for the next twelve have leveled off," Duncan said in a statement.
While 15 percent of those polled by Fannie Mae said their household income was significantly lower than it was 12 months ago, that was a record low since the surveys began in June 2010. Some 46 percent of respondents expected their personal financial situation to stay the same over the next 12 months, a 2 percentage point increase from last month.
With the economy adding only 69,000 jobs in May — half the market consensus forecast — the unemployment rate inched up to 8.2 percent in May.
"Current jobs data are reminiscent of the spring slowdown that continued into the summer months during the last two years," Duncan said. "If this pattern continues, we do not expect to see any significant upturn in consumer sentiment during the summer and a meaningful housing recovery likely will be delayed once again."
Consumer attitudes toward buying or renting suggest positive trends observed since early fall 2011 appear to be reaching a plateau. The percentage of respondents who said they would buy if they were going to move fell from 66 percent in March to 63 percent in May.
But the percentage of those who expect home prices to increase in the next 12 months (34 percent) and those who expect mortgage rates will go up (41 percent) was up from April to May. Both indicators suggest the potential for would-be homebuyers to purchase a home.