Third, despite record low mortgage interest rates, the depressed housing market remains a significant impediment.1 While house prices are no longer overvalued by historical standards, restrictions on access to credit and the large number of homes in the foreclosure pipeline means that home prices remain under downward pressure. The ongoing weakness in housing makes achieving a vigorous economic recovery more difficult for several reasons:   The strong rebound in housing construction and related activities, such as furniture sales, that typically power economic recoveries following deep recessions is absent.   The decline in home prices has eroded household wealth, which then inhibits consumer spending. Since home values peaked in 2006, homeowners have lost more than half their home equity and many expect further declines.   The weakness in home prices has reduced credit availability because many households and small businesses use their homes as their primary source of collateral for loans. 1  See Board of Governors of the Federal Reserve System, 2012 White Paper, “The U.S. Housing Market: Current Conditions and Policy Considerations” and “Housing and the Economic Recovery” by William Dudley. 2  BIS central bankers’ speeches    The big drop in house prices has made it more difficult for borrowers to refinance, undercutting some of monetary policy’s ability to support demand. In a recent speech I discussed some policy interventions that could help to stabilize the housing market. I will not discuss this further as our focus today is on education.
4  BIS central bankers’ speeches  The housing bust and the onset of the recession in 2007 strained state and local government finances. Most local governments rely heavily on property tax revenue to fund their schools and other activities. This was particularly true during the first half of the decade, when the housing boom strongly supported property tax revenues. Then came the bust; steep declines in the housing market led to corresponding drops in local property tax revenue. State governments’ revenues also fell, as rising unemployment cut income tax revenue and reduced consumption shrank sales tax revenues. Since most state and local governments spend at least half of their budgets on education, these developments have constrained funding for our primary and secondary schools. To stave off drastic state and local government spending cuts, the federal government allocated $ billion to states, including New York and New Jersey, for education through the American Recovery and Reinvestment Act (ARRA). Research done here at the New York Fed reveals that school finances in both New York and New Jersey were impacted by the Great Recession, with New Jersey sustaining particularly severe cuts.4 ARRA funds helped school finances in both states, yet did not completely compensate for lost state and local revenues. With ARRA funding drying up and our local and state economies still under stress, a question looms before us. How might we expect school finances and student learning to fare in the near future?