A top economist for financial services giant Goldman Sachs (GS) said Friday that the impact of the Fed's recent easing cycle have been "reassuring" in at least one area, but he repeated his belief that there will be about $500 billion of mortgage credit losses from the current crisis.
Speaking at a conference put on by the Federal Reserve Bank of Chicago, Jan Hatzius, Managing Director and Chief U.S. Economist of Goldman Sachs, also said that house prices will likely continue to decline over the next several years, eventually returning to levels seen during the 1990's and the first few years of this century.
Hatzius explained that elevated supply levels for housing have forced home prices lower. He characterized the home price declines as "very sizable," noting that they were down 10% through the end of last year and down around 15% at his point. Hatzius pointed out that vacancy rates, a good indicator of housing supply, are still going up.
Trying to pinpoint the cause of the current situation, Hatzius stated that the U.S. housing boom was nothing special compared to housing booms in other countries, but that the extent of mortgage debt creation here is "quite special."
The Goldman Sachs economist said that at the end of 2006, about 7% of all homeowners were in negative equity, meaning that the value of their houses is less than the outstanding balance on their mortgages.
Hatzius predicted that home prices would return to the average level for the period between 1993 and 2003 - fully reversing the sharp advance seen before the advent of the recent credit crunch. Hatzius admitted that this outlook was "somewhat more pessimistic" than some other closely-followed predictions.
Given this outlook, Hatzius said that there will likely be about $500 billion of mortgage credit losses out of $3 billion in negative equity by the time the process is complete. This repeated an estimate given in previous research notes from Goldman.
Total credit losses, which include loans outside the mortgage sphere, will be over a trillion dollars, Hatzius said.
Commenting on the Fed, Hatzius said that the Fed's recent moves to ease monetary policy have helped to limit what are called "feedback effects" - issues that can operate through a loop, like when the price of an asset is used to determine the asset's value, which in turn affects that asset's price.
Hatzius explained how feedback worked in the recent credit crunch. He said the need for banks and other institutions to retrench as losses mount involuntarily raises leverage and that leads to the feedback effect in the rest of the financial system.
Hatzius said that the financial system's response to the Fed's easing has been "reassuring."
The Fed announced the latest in its recent string of interest-rate cuts in late April, which brought the central bank's key rate to 2% - its lowest level since November of 2004.
In total, the Fed's benchmark rate is 2.25 percentage points lower than its level at the end of 2007, and 3.25 percentage points below where it was when the central bank began to cut rates last August.
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