charles i plosser : the economic outlook and housing speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the women in housing & finance, inc., washington dc, 20 may 2014. * * * the view expressed today are my own and not necessarily those of the federal reserve system or the fomc. highlights • president charles plosser gives his views on the sustainable improvement in housing in the context of a broader economic recovery. he also discusses the fed ’ s monetary policy issues, including forward guidance. • president plosser is optimistic about the housing recovery. he believes that even though sales have leveled off recently, prices are still rising, and fundamentals remain sound, including stronger household formation, solid job growth, and consumers with stronger balance sheets. • he thinks that the u. s. economy is on firmer footing today than it has been in several years. he expects continued progress in 2014. he adds that one of the more encouraging signs for the economy comes from the labor market. • president plosser believes reducing the pace of asset purchases in measured steps is moving in the right direction, but the time may come sooner than many expect when interest rates may have to rise if we are to avoid falling behind the curve. introduction thank you for inviting me here today. women in housing & finance meetings have featured a number of federal reserve policymakers in recent years. a review of their speeches traces an arc through the turmoil in the u. s. housing market, which led to the worst financial crisis and economic downturn since world war ii, the regulatory reform that followed, and the moderate but steady recovery over the past five years. in january 2008, then - chairman ben bernanke addressed your group a month after the great recession began, following sharp and dramatic declines in the u. s. housing market during 2007. then, in june 2009, former governor elizabeth duke described the actions that the federal reserve had taken to contain the financial crisis and promote economic recovery. in february 2011, former kansas city fed president tom hoenig asked whether the dodd - frank act would actually improve the financial regulatory climate and solve the yetunresolved issue of too - big - to - fail institutions. today, i am delighted to join you at a time when, despite the effects of the severe winter weather, the economy is on the firmest footing it has been on since the recovery began. but this does not

the boom. sales have fallen somewhat since mid - 2013, due in part to rising mortgage rates, but those rates remain low by historical standards. the fundamentals of the housing market remain sound, including stronger household formation, solid job growth, and consumers with stronger balance sheets. home prices are well below their peaks, but they continue to improve as the market recovers. two national measures were up recently : the s & p case shiller home price index was up 12. 8 percent year over year in its latest february number, and the corelogic national house price index was up 11. 1 percent in march. some have expressed concern over the housing recovery in recent months, but i am more optimistic. as i said, the fundamentals remain sound, and even though sales have leveled off recently, prices have continued to rise even over the past three months. that suggests that supply may be restricting sales more than weaker demand. but we will have to wait and see how the remainder of the spring and summer plays out. the structure of housing finance in our country remains a topic of intense discussion as it was before, during, and after the crisis. as i have argued in the past, the governmentsponsored enterprises, or gses, were permitted to operate for private profit but with an implicit guarantee from the government, and so they were able to take extraordinary risk at bis central bankers ’ speeches the taxpayers ’ expense. 1 this was a classic case of moral hazard, and it must not be repeated. there are many proposals for a new system of housing finance with varying levels of government support. there is no clear or easy answer to the degree of government involvement in the housing market ; that is a decision we must make as a nation, carefully weighing the benefits of homeownership with the costs of the misallocation of scarce capital and the risks of unintended consequences. the u. s. subsidizes homeownership, more than any other developed country. we do so by providing an interest deduction for home mortgages and by underwriting housing debt through an explicit taxpayer support for the gses, which is reflected in mortgage rates. there are debates about the quantitative effects of these subsidies. but we should not be afraid to ask hard questions. most financial advisors would tell you to diversify your asset holdings, yet our housing policies incentivize families to do just the opposite : put your savings in your home. the policies encourage homeownership over