The Economic Outlook

Jeffrey Lacker

Speech from Federal Reserve Bank of Richmond

Abstract: It's a pleasure to speak to you today. My topic is the current economic situation and the outlook for the period ahead. Before we begin, though, let me remind you that the usual disclaimer applies: The views I express are my own and are not necessarily shared by any of my colleagues on the Federal Open Market Committee.1 The background for today's economic situation is the remarkable boom in housing that ended a couple of years ago. From 1995 to 2005, new housing starts increased by more than 50 percent, and existing home prices increased by more than 150 percent (as measured by the Case-Shiller repeat sales index), and the homeownership rate increased significantly, from around 64 percent to 69 percent. Favorable fundamentals contributed to the boom; per capita real income grew much more rapidly in the decade after 1995 than in the decade before, and real mortgage interest rates were low relative to prior periods, especially after 2002. The inelasticity of the supply of buildable lots generated significant price increases in many parts of our country. Elsewhere, price appreciation was more modest. Housing demand ultimately became satiated in many major markets, however, and housing activity peaked in early 2006 in several regions. Since then, new housing starts have fallen by 55 percent, and since mid-2006, home prices have fallen by 18 percent.

Date: 2008-07-08
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