Saturday, March 05, 2005

"Big Al" says No Bubble...

Soothing Bubble Fears...AgainFederal Reserve Chairman Alan Greenspan attempted again last week to soothe fears of a nationwide housing market collapse even as some legislators took the Chicken Little approach to home buying.

"I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," Greenspan told the House Financial Services Committee.
"I don't expect that we will run into anything resembling a collapsing bubble. I do believe that it is conceivable we will get some reduction in overall prices, as we've had in the past, but that is not a particular problem," the Fed chairman added.


Greenspan was responding to the fears of Rep. Scott Garrett (R-New Jersey) who complained that his plans to buy a Washington, D.C. home will be scuttled by a sudden deflation in home prices in the D.C. area.
"The bubble is about to burst as soon as I buy my house down here," Garrett complained to the Fed chairman.


The nation's capital is one of a dozen of East and West Coast urban areas which economists say are most susceptible to a so-called housing market bubble that could suddenly pop and send prices plummeting.

Few expect a nationwide collapse of the housing market and even where there have been skyrocketing prices, price flattening, rather than fast deflation, is a greater possibility.
"More likely, prices would stop rising and allow valuations to catch-up," said Barker French, chief investment strategist of Brinker Capital, a King of Prussia, PA-based investment consulting firm.


"The fear of a housing collapse is overblown. There are pockets of excessive valuations, mostly on the east and west coasts. It is highly unlikely that house prices across the US would fall in unison," French said in the company's forecast for the 2005 economy.


On the other coast, Michael Carney, a real estate economist with the Real Estate Research Council at California State Polytechnic University-Pomona, was even more adamant.
"People who talk about a bubble are blowing smoke,'' he said.
Carney said even another full percentage point or two rise in interest rates may only slow the rise of housing prices in the Golden State.


The continued influx of immigrants, move-up buyers, and the growing second home market in a state where the housing inventory is more than 200,000 homes short, has already begun to move the boom inland to the lesser developed Central and Imperial Valleys where homes are cheaper.
"I don't see anything to stop them,'' Carney said.


French also said delinquency rates for residential real estate, as a percentage of total bank loans, has been falling since 1990. In 1990 3.2 percent of real estate loans were in default. Between 1995 and 2003 the percentage floated in the 2 percent to 2.4 percent range. During 2004, the percentage of loans delinquent fell to 1.6 percent.

Greenspan said homeowners have accumulated considerable wealth because of the rapid run-up in the value of their homes in recent years, and many have been tapping into that wealth through home sales, cash-out refinancings and home-equity loans -- in some cases to see them through hard times, including lingering unemployment.

The Fed estimates that home values have doubled from $8 trillion to $16 trillion since 1996, out pacing the rapid growth of mortgage debt, which also has doubled from $3.5 trillion to $7 trillion in that time.

Most homeowners are not mortgaged to the hilt because they purchased homes with 20 percent down, giving them a cushion against all but a major housing market crash.

Greenspan said even those home owners with 100-percent financing have had such a rapid gain in value that they too are sandbagged against a flood of price declines. "Remember that there's a very significant buffer in home equities at this stage," Greenspan said, referring to the $9 trillion difference between values and outstanding home loan debt.

Greenspan did concede the more likely scenario, a drop in home values anywhere would likely be followed by a drop in consumer spending and a resultant impact on the local or overall economy. Consumer spending is what drives the economy and much of it today is driven by the "wealth effect" of risking home values.

"Some reversal in that wealth is not out of the question. If that were to occur, households would probably perceive the need to save more out of current income; the personal saving rate would accordingly rise, and consumer spending would slow," Greenspan said.
--------------------------------------------------------------------------------Written by Broderick Perkins

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