RealEstateEconomyWatch.com

The outlook for new housing starts in the coming years is “relatively subdued” due to an oversupply of vacant homes and the likelihood that foreclsures will remain elevated, the vice chairman of the Federal Reserve said yesterday.

“I do not anticipate that the recovery in homebuilding will exhibit its typical cyclical pattern. Even though the decline in residential construction began well in advance of the overall contraction in real activity, the sector continues to have an oversupply of vacant homes, Vice Chairman Donald L. Kohn told the National Association for Business Economics in St. Louis.

Kohn noted that the recent news on housing has been encouraging, given the central role that this sector has played in the recession. “Greater stability in house prices should help reduce the uncertainty about the value of mortgages and mortgage-related securities held on the balance sheets of banks and other financial institutions, which should have a positive effect on their willingness to lend,” he said.

“Sales of new and existing homes have been on an uptrend since early this year, and the rise in sales has pared the inventory of unsold new homes substantially. As demand has strengthened and inventories of new homes have come down, construction of single-family homes has risen markedly in recent months. Meanwhile, several measures of house prices, after tumbling for the past two to three years, have increased in the past few months. Moreover, survey data suggest that an increasing number of potential homebuyers seem to think that house prices are near their bottoms and will increase over the coming year. And, based on prices from admittedly thinly traded futures, financial market participants appear to have become more optimistic about house prices as well,” he said, and added he expects housing starts to continue to improve gradually in coming months.

Kohn said the Fed will be alert for any evidence of a potential pick up of inflation and ended on a cautionary note.

“Uncertainty about the course of the economy is a lot lower than it was just a few short months ago. But we cannot lose sight that this uncertainty remains quite high; we are still in largely uncharted waters when it comes to fully understanding how our economy will recover from the severe recession and financial disruptions of the past several years and how that recovery and inflation will be affected by the extraordinary actions we took,” he concluded.