Dudley calls for break in housing cycle

Federal Reserve Bank of New York President William Dudley recently said one of the most important issues the country faces is breaking the vicious cycle in the housing market that is holding back economic growth. The cycle refers to foreclosures clogging the housing market and driving prices down, which in turn decrease home equity for struggling borrowers who cannot qualify for refinancing. This then leads to more loan defaults, and decreased consumer confidence and spending.

Bloomberg reported that policymakers and the Federal Reserve are developing programs to help prevent a double-dip recession in the housing market, such as a third round of large-scale asset purchases by the government, in order to increase demand for mortgage-backed securities and help stabilize prices.

While the Federal Reserve recently launched Operation Twist, where the central bank would sell $400 billion of short-term debt for longer-term securities to help keep interest rates low, Dudley believes monetary policy will not solve all the problems holding back the housing market. Rather, Dudley said the government must also focus on housing and fiscal policy, the news source reported.

“A vicious cycle could be replaced by a virtuous circle, in which stabilization in house prices supports spending, growth and jobs," Dudley said.

In a speech at Fordham University's Gabelli School of Business, Dudley told students another way the central bank might help the housing market is by putting pressure on mortgage rates to remain low, Reuters reported.

"The fact that we decided to reinvest maturing funds back into the agency mortgage-backed securities market I think is a signal that we have some concerns about the level of mortgage spreads, and certainly that we do care about housing affordability as a way of supporting economic activity," Dudley said.

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