have also seen sharp drops in home prices. when home prices were at their peak three years ago, most analysts agreed that housing valuations looked to be substantially higher than warranted by fundamentals. however, home prices at the national level are now 17 percent off their peak, with some states, such as california and florida, seeing declines on the order of 40 percent. 1 these declines may have reversed much, or perhaps all, of the earlier overvaluation. notwithstanding this correction, all indications are that the softness in housing activity is likely to persist for some time. in normal times, population growth and the attendant formation of new households tend to support housing demand. indeed, by some estimates, the current stock of housing is not high relative to the number of housing units that would be predicted by long - run trends in household formation. however, the actual number of households has fallen well short of trend household formation. macroeconomic conditions no doubt explain part of the shortfall in household formation, as, for example, younger people facing weak job figures based on data from loanperformance, a division of first american corelogic. prospects defer striking out on their own. more generally, the soft economy has diminished demand for housing among already - established households. high rates of job loss and weak income growth are directly reducing what some individuals can spend on housing, and the prospect of losing a job or suffering an income loss is damping the housing demand of others. the cost and availability of mortgage credit is also bearing critically on housing demand. with private - label securitization markets almost completely closed, most purchases are financed with some form of government - supported credit. purchasers with strong credit histories and sufficient down payments can obtain a " conforming " mortgage, one that can be sold to the housing government - sponsored enterprises ( gses ). loans insured through the federal housing administration ( fha ) are also available to eligible borrowers, who have historically been first - time homebuyers, borrowers without significant down payments, and higher - risk borrowers. in addition, veterans with eligibility can obtain virtually 100 percent financing through va loans. however, households without access to government - supported programs are having much more difficulty obtaining a mortgage than in the past. one obstacle is that the private mortgage securitization markets that previously supported most non - gse mortgage lending are now shut down. subprime and near - prime mortgages – which traditionally were funded almost exclusively through sec

elizabeth a duke : stabilizing the housing market – next steps speech by ms elizabeth a duke, member of the board of governors of the us federal reserve system, at the global association of risk professionals ’ risk management convention, new york, 11 february 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * in the summer of 2007, the u. s. and global economies entered a period of unprecedented financial turmoil, which has since led to a significant slump in macroeconomic activity. problems in both the housing sector and the housing finance sector played a central role in precipitating the crisis, and ongoing weakness in housing activity, along with persistent strains in mortgage markets, continue to inhibit a broader recovery. in particular, we have entered a cycle where high levels of default on mortgage debt have led to a reduction in the availability of mortgage debt as well as a tightening of terms for it. this situation has led to lower levels of home sales and prices paid for homes, which, in turn, contributes to yet more defaults by borrowers. as financial risk managers, i am sure you are aware of the important steps that have already been taken to try to break this cycle, but that you also recognize the need to do more. my remarks today will focus on the next steps – efforts to increase demand for homes, efforts aimed at further reducing preventable foreclosures, and efforts aimed at limiting the costs imposed on households and communities by foreclosures that cannot be avoided. both the government and the private sector have important roles in these efforts. these suggestions and recommendations are my opinion alone and do not reflect the views of other members of the federal reserve board or any other government entity. the current weakness in housing markets housing activity remains extraordinarily weak. sales of new and existing homes have been running at a pace that is 60 percent of that seen at the peak in 2005. single - family housing starts are now less than one - quarter of their peak level. with the cutbacks in construction, inventories of unsold new homes have declined, but the months'supply – that is, inventories relative to sales – is still very high by historical standards. the inventory of existing homes for sale is also quite elevated – and it would be even higher if not for would - be sellers that have withheld or withdrawn their homes from the market amid poor selling conditions. we