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Housing cooldown is 'orderly,' Fed chief says

By ASSOCIATED PRESS
Published May 19, 2006

WASHINGTON - The housing market, after flying high for five years, has lost altitude and appears headed for a safe landing, Federal Reserve chairman Ben Bernanke said Thursday.

"It seems pretty clear now that the U.S. housing market is cooling," Bernanke said in a question-and-answer session following a speech he delivered on banking in Chicago.

He noted that home sales are slowing, as is housing construction.

"Our assessment at this point ... is that this looks to be a very orderly and moderate kind of cooling," Bernanke said.

One of the things that Bernanke and his Fed colleagues are keeping close tabs on is the extent to which a housing cooldown will slow overall economic activity.

The housing market has been a top economic performer. The sector has racked up record high sales five years in a row. Rapid appreciation in house prices has made homeowners feel wealthy and has powered consumer spending.

Cooling of the housing sector is expected to be a factor in slower economic growth in the months ahead.

The economy in the first three months of this year grew at a brisk 4.8 percent pace, the fastest in 2½ years. Many economists predict growth will moderate to about 3 percent in the April to June quarter, still a good pace.

Bernanke did not discuss the future course of interest rates in his speech or in his remarks afterward. The Fed boosted rates last week.

Some economists think the odds are growing that the Fed will bump up rates again at its next meeting, June 28-29. Those analysts said the odds went up after a government report Wednesday showed that consumer inflation bolted ahead in April.

On the issue of risky home mortgages, Bernanke pointed out that the Fed has issued some guidance for lenders and underscored the importance of borrowers making sure they understand how interest-only and other nontraditional mortgages work.

"We're not saying you shouldn't make these loans. What we're saying is that they be done the right way," Bernanke told the banking conference.

Borrowers and lenders holding exotic mortgages could get clobbered if housing prices drop or interest rates rise sharply.

In his speech, Bernanke said federal banking regulators will press ahead on a sweeping plan aimed at improving risk management for the country's largest and most internationally active banks.

The proposal, years in the making, dubbed Basel II, would instruct such banks to use complex new risk formulas to determine capital requirements.

[Last modified May 19, 2006, 06:24:20]