Yellen Sees Growth, but Housing Risk

By Jon Hilsenrath and Nick Timiraos 

        Federal Reserve officials are seeing a long-awaited spring revival in economic growth--marked by increased business hiring and consumer spending--but they have become concerned in recent weeks that that the housing sector is missing from the upturn.
        In testimony before Congress's Joint Economic Committee on Wednesday, Fed Chairwoman Janet Yellen said the economy was on track for "solid growth" in the current quarter after a harsh winter that temporarily crimped business activity. But she held out housing as a potentially more lasting problem.
        A housing slowdown that became evident late in 2013 shows few signs of reversing. Existing home sales in March fell for the seventh time in eight months and were 7.5% below the seasonally adjusted annual rate of a year earlier.
        New building permits for single-family homes stood below the year-earlier level for the second straight month in March. Sales of new homes during the first quarter were 1.8% below the year-earlier level, punctuated by a 13% decline in March.
        "The recent flattening out in housing activity could prove more protracted than currently expected, rather than resuming its earlier pace of recovery," Ms. Yellen warned lawmakers, expressing an uncertainty about housing she hadn't stated before. The development, she said, "will bear watching."
        If housing fails to revive as expected and holds back the broader recovery, Fed officials could decide to take even more time on an already slow path to eventual interest-rate increases. The Fed has held short-term interest rates near zero since December 2008 in an effort to stabilize the financial system and boost growth by spurring more spending, hiring and investment. The central bank amplified this approach with purchases of long-term mortgage and Treasury bonds to drive long-term rates lower.
        Encouraged by signs of a broad economic pickup, Fed officials agreed at a policy meeting last week to keep gradually reducing the bond purchases. At the same time, the Fed signaled there was no change in its plan to keep short-term interest rates near zero for many more months. Most Fed officials don't expect to raise short-term rates until 2015.
        Ms. Yellen has warned the Fed's interest-rate calculus will change if the economy veers from its expectations.
        The Fed's interest-rate policies are an important part of the housing puzzle. Mortgage rates on the average 30-year fixed-rate mortgage climbed to 4.6% last June, from 3.6% in early May, after then-Fed Chairman Ben Bernanke hinted at looming reductions in bond purchases. The rate increase coincided with home-inventory shortages that gave sellers more power to ask for higher prices, crimping housing affordability.
        Some economists say the affordability squeeze led buyers to step back from the market. But the effect of higher mortgage rates on housing activity typically fades after three to four quarters, according to research from economists at Goldman Sachs. If that is right, then the effects of last year's rate increase "should finally be behind us" by the summer, said Goldman economist Hui Shan in a report Tuesday.
        "Everyone panicked" last summer, said Steve Capen, a real-estate agent in St. Petersburg, Fla. "But rates have been sitting there for a while now. Everyone's adjusted to it."
        But there is a gloomier scenario. Some analysts have warned that the market's health had been overstated by a sudden but short-lived release of pent-up demand from traditional buyers last spring, coupled with aggressive purchases by investors soaking up a glut of distressed properties.
        These analysts argue that broader economic problems could hold housing back, including the failure of younger households to strike out on their own because their incomes are uneven and they have high debt loads. Continued tight credit standards have made it harder for these marginal buyers to obtain mortgages.
        Home builders are approaching the slowdown warily. In several parts of the country with inventory shortages, builders have been slow to ramp up construction. Some of them are focusing narrowly on building fewer homes that can fetch high prices, catering sales to affluent buyers who have fared better during the recovery.
        "As we increased our prices...over the last couple of years, we've depleted that pool of the first-time home buyer," said Donald Tomnitz, chief executive of D.R. Horton Inc., the nation's largest home builder, in a call with analysts two weeks ago.
        Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Nick Timiraos at nick.timiraos@wsj.com
        (END) Dow Jones Newswires

        May 07, 2014 19:26 ET (23:26 GMT)