Not everyone thinks the economy is as bad off as doomsayers have been saying lately. In fact, William Dudley, president and CEO of the Federal Reserve Bank of New York, says the expansion we’ve experienced for the past seven years has put American homeowners in a much better position to withstand any pending trouble.
Dudley spoke at a recent press briefing at the New York Fed to address the state of an economy that has been, despite what it might seem, steadily getting better since mid-2009. But because the expansion has been going for so long, Dudley said, many are starting to wonder “whether this expansion has already entered its twilight years.”
But such fears are not based in real evidence, particularly in a strong housing market, he said. Dudley said that house price growth is “running nationally at around 5 percent per year” and that homeowners are “being more cautious in how they are responding to the rise in home values” than homeowners were in the wake of the mortgage-and-loans free-for-all that led to the collapse of 2008.
Dudley dismissed recent talk of the Fed possibly creating a negative interest rate to combat any economic shocks. Post-press conference, he referred to talk of such measures as “extraordinarily premature.” Fed Chair Janet Yellen last week said she would consider the measure, though she did say negative rates were unlikely.
Dudley said the increase in debt paydown “due to a combination of lower interest rates, shorter loan terms, and aging of mortgages … is reflected in increased household saving and growing home equity. We expect these trends to continue to help households rebuild their balance sheets over the near term, thereby further increasing the household sector’s resiliency to shocks.”
Dudley cited significant decline in delinquency rates, saying that the majority of the “bad debt from the boom years” is gone, while new foreclosures are at an all-time low. “The combination of charge-offs and tight mortgage underwriting standards over the last several years,” he said, “has shifted the stock of outstanding mortgage balances toward lower-risk borrowers, who are typically older with more stable incomes.”
This puts the American homeowner in a much better place to withstand the bumps that might come with expansion, he said.
However, Dudley offered a few caveats. First, he said aggregate statistics “can mask some important variations” in the market and that some local markets where, as it was in the prior boom, house prices and mortgage growth are quite strong. But not all buyers are able to build their equity or borrow with ease. Consequently, he said, “this subset of the population has been less able to deleverage and still faces relatively high debt service costs, which constrains their consumption, investment and saving behavior.”