ben s bernanke : housing markets in transition speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the 2012 national association of homebuilders international builders ’ show, orlando, florida, 10 february 2012. * * * the economic recovery began more than two years ago, but it doesn ’ t feel like much of a recovery for many americans – certainly for those of you who depend on the housing sector for your living, as well as for the millions of others who have seen their home values plummet or lost their homes through foreclosure. though some progress has been made in reversing the losses in jobs and income sustained during the recession, the pace of expansion has been frustratingly slow and the unemployment rate remains very high by historical standards. the state of the housing sector has been a key impediment to a faster recovery. in the typical economic recovery, a resurgent housing sector helps fuel reemployment and rising incomes. but as you know all too well, that scenario has not played out this time. although the precipitous declines in construction that began in 2006 are, thankfully, now behind us, homebuilding remains depressed in most areas, relative both to where it was before the downturn and to where it will need to be to meet the needs of a growing population in the longer term. the federal reserve has a keen interest in the state of housing and has been actively engaged in analyzing the housing and mortgage markets. 1 issues related to the housing market and housing finance are important factors in the federal reserve ’ s various roles in formulating monetary policy, regulating banks, and protecting consumers of financial services. traditionally, mortgage interest rates have been a key transmission channel of monetary policy ; and banks ’ mortgage lending policies directly affect their own safety and soundness as well as the access of creditworthy households to mortgage credit. my remarks today will focus on current housing market conditions and on how housing problems have affected borrowers, lenders, communities, and the broader economy. i ’ ll also discuss some specific sources of our housing problems, including tight conditions in the mortgage market and the overhang of foreclosed and vacant homes. overview of the state of the housing market one way to understand conditions in the housing market is to focus on the balance of supply and demand. for the past few years, the actual and potential supply of single - family homes has greatly exceeded the effective demand. the

plus an add - on of 5 percentage points. a comparable extension could happen in case a mortgage institution would become insolvent. to get the proportions of the debate right, it is key to remember that no danish mortgage institution has failed for more than 200 years, and instances of a 5 percentage point increase in interest rates over a 12 month period have only been observed at very few instances during the last 150 years. but the substantive issue of refinancing risk has been taken care of. one discussion has been whether the 5 percent trigger was needed or whether one should just refer more generally to the very unlikely event of a failed auction. the point is however that identifying a failed auction in practice is not very easy. a discretionary decision by authorities would probably be needed. the interest rate trigger is then a practical criterion, also allowing investors to price any such risk. another discussion has been if, and to what extent, the new law would add to the cost of the bonds. will there be an additional risk premium for investors? as a first approximation, the answer is yes, namely the risk of having a maturity extension at a rate of an additional 5 percentage points in cases where the market rate increases by, say, 6 or 7 points. our estimate is that the effect is less than 10 basis - points at the point of issuance, and probably smaller. note however, that the new law provides a high degree of certainty for investors. this is a material change compared to the previous situation, where investors in the case of extreme events were bound to have open ended speculation on the possible actions of public authorities. this new certainty runs counter to a higher risk premium stemming from the new law. a third discussion has been on whether a possible self - reinforcing negative market valuation effect could come into play in cases where markets rates would be approaching the five per cent trigger point, say by increasing by 4 percentage points. one answer is that such an effect would be rather limited, since the maturity of the extended bonds is so short. another answer is that an increase in interest rates of 5 percentage points is so extreme that many other reactions would be triggered, rendering the final outcome extremely hard to estimate. for example, much larger uncertainty in markets could actually reallocate demand for bonds from the longer maturities to the shorter ones. another possible effect would be a flight of borrowers out of the shorter maturities, in particular if they can thus repurchase the bonds at a market discount,