* Renewed focus on housing spotlights core problem
* Bernanke: buying mortgage debt "viable" option
* Growth of housing sector has beneficial spillovers
* 7.5 million households in foreclosure or delinquent
WASHINGTON, Nov. 3 (Reuters) - For the U.S. economy, it all comes back to the housing market.
A fresh emphasis on healing the housing sector by officials at the Federal Reserve, in the Obama administration and in state capitals reflects the view that a healthier real estate market would go a long way in strengthening the economy.
Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank was considering buying more mortgage debt to jolt the broader economy onto a more robust growth path.
"The housing sector is a very important sector," he said at a news conference after a two-day policy meeting. "Problems in that sector are a big reason why our economy's not recovering more quickly."
Economists say the Fed could do well to target the housing sector. For one, it is at the center of the economy's ills; for another, homebuying can be a catalyst for a wide range of consumer purchases from refrigerators to lawn furniture.
While many other sectors of the economy have found their feet, housing continues to lag abysmally, held back by high rates of foreclosure and homes that have dropped dramatically in value.
Around 7.5 million U.S. households are either in foreclosure or delinquent on their mortgage, and 11 million homeowners owe more than their homes are worth.
The Obama administration and a leading housing regulator announced plans last week to widen a program aimed at helping so-called underwater borrowers refinance.
At the same time, state attorneys general are pressing for a settlement with top banks over alleged foreclosure abuses that could require the lenders to commit about $15 billion to reduce principal for struggling homeowners and modify loans.
"Clearly, the housing sector is an obvious candidate for policy intervention," Goldman Sachs economist Andrew Tilton wrote in a recent note to clients.
WAKE UP CALL
Fed Governor Daniel Tarullo caught some in financial markets off guard by recommending in a speech on Oct. 20 that the central bank expand its purchases of mortgage-backed securities, reopening a debate many had thought closed.
His ideas drew quick support from two of the most influential Fed officials -- Vice Chair Janet Yellen and New York Fed President William Dudley -- and has resonated with others.
But why housing, and why now? At just more than 2 percent of U.S. gross domestic product -- down from 6 percent during the housing boom -- residential investment isn't that big a component of the $15 trillion U.S. economy.
However, Tilton and others believe housing "punches above its weight" and generates enough momentum to be critical to strong growth. "Housing might be special," Tilton concluded.
Housing has led the economy out of past recessions. It creates jobs and is a catalyst for spending on goods and services.
The sector is usually a key avenue for the transmission of monetary policy but the drop in home values has locked many Americans out of refinancing, while leading others to fear taking the plunge by buying a home.
Coaxing mortgage rates a bit lower could lead potential borrowers into the market. MBS purchases could directly lower housing borrowing costs.
"Their actions are more effective when they target markets that have wider spreads," said Joseph Gagnon, a former Fed economist now at the Peterson Institute.
In September, the Fed resumed buying MBS to replace housing debt that was rolling off its balance sheet. Adding to this supply would be "a viable option" if circumstances were right, Bernanke said, although he declined to specify what might spur the Fed into action.
NOT UNIVERSALLY POPULAR
Another reason to spotlight housing may be timing. After blaming Japan's natural disasters, Europe's debt woes, and a spike in oil prices for the slow U.S. recovery, officials at the U.S. central bank have come round to the view that there is a more fundamental problem with the economy.
"I'd interpret the focus on housing as a result of the wake up call they got this summer," JPMorgan economist Michael Feroli said. "Each time we've been disappointed so far in this expansion they have been saying 'temporary factors.' This summer they finally realized that wasn't credible and took a fresh look at the recovery."
Even so, any renewed expansion of Fed holdings with new MBS will face opposition within the central bank.
Some top officials argued that the Fed's previous $1.25 trillion in MBS purchases blurred the line between monetary and fiscal policy by targeting a specific sector. Those complaints resonated more broadly, as well, and the Fed eventually decided its ultimate goal would be to return to an all-Treasury portfolio.