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Greenspan Warns of Housing Bubble

The Fed chief perceives extreme overpricing in many local markets, but not nationwide.

By Annette Haddad
Times Staff Writer

May 21, 2005

Federal Reserve Chairman Alan Greenspan said Friday that some regional housing markets were showing signs of unsustainable speculation and "froth" and that there were "a lot" of local housing bubbles.  The comments were Greenspan's most detailed description yet of risks in the booming real estate market, and reflected the Fed's growing concern about the need to tighten mortgage lending standards. Greenspan's remarks, during a question-and-answer session after a speech in New York, were reminiscent of his statement in 1996 that the then-hot stock market was afflicted with "irrational exuberance."  The Fed chief said Friday that he didn't see a national housing bubble and that the economy was not at risk, an assertion he had also made in February.  "But it's not hard to see that there are a lot of local bubbles," he said Friday, without specifying these local markets. Greenspan said price surges might "simmer down" as housing became less affordable. 
"It's pretty clear that it's an unsustainable underlying pattern," the Fed chief said. "People are reaching to be able to pay the prices to be able to move into a home."  The central banker went beyond his comments in February by describing how he saw "very significant acceleration" in the turnover of U.S. homes, partly because of purchases of second homes. He said speculation in both the housing and mortgage markets had accelerated.  Greenspan said buyers were using riskier financing techniques, such as "interest only" loans, to squeeze into houses.


Adjustable-rate and interest-only mortgages accounted for nearly two-thirds of new loans in the second half of 2004, according to the Mortgage Bankers Assn.  In California, home prices continue to rise at a double-digit pace. Last month, the median price paid for a house or condominium in the state rose 17.5% on a year-over-year basis to $424,000, according to DataQuick Information Systems.  Some analysts, agreeing with Greenspan that there is not a national housing bubble, contend that hot regional markets such as Southern California and south Florida have developed into localized bubbles because of sharp price increases that have outpaced the rise in incomes. 


"Affordability is a serious issue," said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange. "The fact is that more people are trying to buy more housing than their incomes can justify." Fueling the state's sizzling market has been relatively low mortgage rates. Even as the Fed has pushed up short-term borrowing costs in the last year, long-term rates ­ those to which most mortgages are tied ­ have remained near 40-year lows.  A sharp rise in mortgage rates could pop these local bubbles, some experts say. Homeowners with adjustable-rate loans will see their payments jump when long-term rates rise.  What is uncertain, experts say, is just when these bubbles might burst. The stock market didn't crash until 2000, four years after Greenspan's "irrational exuberance" comment.  Some economists suggested that Greenspan was partly to blame for the overheated housing market. By letting short-term interest rates hit rock bottom as a means to help the economy recover from the 2001 recession, the central bank helped drive down mortgage rates. That in turn created an exaggerated demand for housing, Adibi said.  "The Fed caused some of the problem, no question," said Adibi, who believes local housing prices may start to fall by the end of the year.  Adibi and others suggested that Greenspan might be trying to reduce the impending shock of a slowing housing market, which could cause consumers to cut their spending. That in turn could spark a recession.

But Greenspan's remarks may be "too little, too late," said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast who has been among the few economists to emphatically describe California's housing market as a bubble.  People have been freely spending "because they feel wealthy" thanks to soaring home prices, he said. "They feel their houses are worth so much more."

"When the market cools, it will have implications beyond real estate," Thornberg added. "Consumers overall will pull back on spending."

Greenspan's comments Friday followed warnings in recent days from banking regulators that lenders should tighten their standards.  The Fed this week issued its first-ever guidelines on home-equity lending, advising financial institutions to reexamine their loan-making criteria. The Office of the Comptroller of the Currency has said it intends to issue new mortgage guidelines in the coming year. 
Greenspan's remarks Friday before the Economic Club of New York were largely about energy prices. A modest easing in oil demand because of higher prices should keep crude oil inventories rising in the United States and elsewhere for some months, he said.

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For the best account of the Federal Reserve  (  One cannot understand U.S. politics, U.S. foreign policy, or the world-wide economic crisis unless one understands the role of the Federal Reserve Bank and its role in the financialization phenomena.  The same sort of national-banking relationships as in our country also exists in Japan and most of Europe.