Today, Treasury Secretary Henry M. Paulson, Jr. delivered remarks on the state of the economy, and especially addressed the current housing market, at the Exchequer Club. His remarks came shortly after the Commerce Department announced that gross domestic product (GDP) growth during the second quarter of 2008 was 1.9 percent at an annualized rate, after a growth of 0.9 percent in the first quarter. According to Bloomberg news, this growth was less than forecasted and the report showed that a recession may have begun in the final three months of 2007.
When discussing the economy during this quarter Paulson said, “It is important to remember that our long term fundamentals are strong. Recognizing the challenges ahead of us, I expect our economy to continue growing this year although at a moderate pace. We are making progress though not in a straight line. Housing continues to be at the heart of our economic challenges and remains our most significant downside risk. We must work through the necessary adjustments in housing and credit markets to return to stronger growth next year and beyond.”
Paulson pointed to the fact that the problems in the housing market such as “lax underwriting standards, excessive home price appreciation, and overbuilding” did not appear over night and as such an immediate fix cannot be found. He did however point to the economic stimulus package as a promising start.

Years of overbuilding have raised home inventories to levels that are far above what Paulson calls “normal.” Currently there is a ten-month inventory of new single-family homes on the market and an 11-month inventory of existing single-family homes. According to Paulson, the historical average is six to seven months. Paulson said the key to stabilization is to work through these inventories as quickly as possible by building fewer homes and bringing more buyers into the market.
“We are seeing the necessary sharp decline in homebuilding,” Paulson said. “Single-family housing starts are down 65 percent from their 2006 peak, and look to remain weak through this year.” He added that sales of both new and existing homes appear to be stabilizing rather than declining, which is at least a step in the right direction to better managing inventory numbers.
Foreclosures and short sales are also responsible for swelling inventories and declining prices, and according to Paulson, they currently make up about one-third of existing home sales.
Paulson foresees foreclosures and existing home inventories to remain substantially elevated until at least next year, and he said home prices are likely to decline further on a national basis. Paulson did offer a glimmer of hope though when he said, “I believe we can move through the bulk of the correction in months rather than years.”
Paulson cited the greater availability of mortgage financing as the key to overcoming these problems, and stated that the Housing and Economic Recovery Act, which President Bush signed into law yesterday, will “modernize FHA programs to provide greater access to FHA mortgages, including to some borrowers who are underwater on their mortgage.” Paulson also stated that parts of the act that will help GSEs Fannie Mae and Freddie Mac will boost market confidence in the “two current, largest sources of U.S. mortgage finance.”
To read Paulson’s full statement, click here.