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Paulson Says Housing Remains Biggest Threat

U.S. Treasury Secretary Henry Paulson said that while tax rebates will help support the U.S. economy in the second half of the year, it faces hardships from housing woes, credit market turmoil and high energy costs.

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AP

"While the stimulus is making our economy stronger than it would have been otherwise, the housing correction, credit market turmoil and high energy prices remain a considerable drag on the economy — and the effects of this drag can be seen in the soft job market," Paulson said in remarks prepared for delivery to the Exchequer Club in Washington.

Paulson said he believes the U.S. economy will continue growing this year "although at a moderate pace."

"We are making progress, although not in a straight line. Housing continues to be at the heart of our economic challenges and remains our most sitnificant odwnside risk," he said. "We must work though the necessary adjustments in housing and credit markets to return to growth next year and beyond."

Paulson said his "first, most urgent priority" was to work through the housing downturn and capital markets turmoil, and he will focus on that until those situations are resolved.

However, he said that could take a while because housing prices are likely to continue falling into next year and mortgage foreclosures and inventories of unsold existing homes are likely to "remain substantially elevated this year and next."

He noted there was a 10-month inventory of new homes on the market and an 11-month inventory of existing homes, compared with a historical average of about six to seven months.

Paulson said working through inventories was the key to stabilizing housing and financial markets.

"The key question is, 'When will the correction be largely behind us?' While home price adjustments will continue for some time, and certainly well beyond the end of the year, I believe we can move through the bulk of the correction in months rather than years," Paulson said.

Paulson said there was a clear need to strengthen government sponsored mortgage giants Fannie Mae and Freddie Mac's ability to provide liquidity to the home financing market by giving them temporary government backstops.

Now that Congress has created a stronger regulator for the GSEs, he said, "all parties must get to work immediately to address the systemic risk issues posed by the GSEs.

He said the "private label" mortgage market will evolve and return with greater risk-awareness and investor discipline."