President and CEO Sandra Pianalto of the Federal Reserve Bank of Cleveland views efforts made by the Federal Reserve to support economic growth and maintain price stability in the market during the Great Recession as a necessary step after an implosion of the housing market.

Pianalto clearly put the blame of the bust on the nation's unsustainable housing situation prior to 2008.

The Fed turned their focus to helping the housing market because "the house industry was at the root of the problem," Pianalto said. Thus, the Fed purchased more than $1 trillion of mortgage-backed securities in order to reduce mortgage rates, she added.

As a result, the asset purchase programs implemented by the Fed through the open-ended third round of quantitative easing has turned the root of the financial crisis into a "hopeful sign" for the economy, the Fed Bank CEO said.

Housing prices stabilized and started to rise in 2012 for the first time since 2007. Additionally, sales of existing homes rose to annual rate of 4.3 million, up from 3.9 million in 2009, Pianalto stated.

Furthermore, housing starts for single-family units have nearly doubled since 2009, increasing from an annual rate of 350,000 units to 616,000 units. Also, multifamily units are nearly seven times what they were three years ago, rising from 50,000 starts in 2009 to an annual rate of 338,000 starts in 2012, according to Pianalto.

However, the benefits of the Federal Reserve’s asset purchases "may be diminishing," she warned.

"Given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past," Pianalto noted. 

She added, "And it is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past." 

On a similar note, recent weakness in the agency MBS market may be a product of the growing viewpoint that unwarranted housing strength will force the Fed to exit the QE3 sooner than expected, said MBS strategists Chris Flanagan and Matthew Carr at Bank of America Merrill Lynch (BAC) in a report.

At some point Pianalto said the Fed will stop asset bond purchases and ultimately unwind large holdings of Treasuries and MBS, which was indicated in the Federal Open Market Committee’s minutes.

When the time comes, the Fed must exit without "adversely impacting the markets, allowing an undesirable increase in inflation and without risking the progressing that has already occurred in our economic recovery," Pianalto said.

cmlynski@housingwire.com