Weighing in on the housing bubble debate that has started percolating in the news media again now that interest rates are on the rise, Federal Reserve Chairman Alan Greenspan told America's Community Bankers last week that reports of speculators bidding up housing prices to the bursting point are wrong.
Appearing at the association's annual convention on Oct. 19, Greenspan said that the most likely participants in speculative trading in the housing market are investors in single-family rentals and second homes, but in 2003 they accounted for less than 11% of total home mortgage originations.
In his most detailed public comments on housing in some time, the chairman indicated that he was not that worried about a collapse in housing prices, noting that he did expect the appreciation in home values to begin slowing down from the rapid pace of the past few years.
"Overall,
while local economies may experience significant speculative price imbalances,
a national severe price distortion seems unlikely in the United States, given
its size and diversity," Greenspan said.
"Chairman Greenspan
has not taken his eyes off housing because he is well aware of the central role
it has been playing in reviving growth in the nation's economy," said NAHB
President Bobby Rayburn. "His comments are reassuring and they also confirm
the continuation of the remarkably strong marketplace that home builders have
been seeing as the economy shifts into higher gear."
Reiterating a point he has made before, Greenspan said that typical home buyers don't have the ability to trade properties the way investors can buy and sell shares on Wall Street, contrary to the underlying assumption of those who have been forecasting housing price bubbles.
"But upon sale of a house, home owners must move and live elsewhere," he said. "This necessity, as well as large transaction costs, are significant impediments to speculative trading and an important restraint on the development of price bubbles."
The chairman also shared his view that home owners are in a good position to weather any price adjustments that should occur, pointing out that in three-fourths of all outstanding first mortgages home buyers made downpayments of 20% or more and that home owners on average owe on their homes only 45% of what these properties are worth.
"Even though some downpayments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity," Greenspan said. "Many of those who purchased their residence more than a year ago have equity buffers in their homes adequate to withstand any price decline other than a very deep one."
Examining a rise in household debt over the past five years, Greenspan said that some of the increase is due to a dramatic number of renter households becoming home owners. Since the early 1990s, the Fed has calculated that the conversion of renters into home buyers is responsible for about one-tenth of the home mortgage debt currently outstanding and that overall household debt as a percentage of income is 8% higher than it would have been if the ratio between home owners and renters had remained stable since 1992.
"One can scarcely argue that those previous renters are less well off since becoming home owners," he said.
The low mortgage rates of recent years have also enabled home owners to improve their financial stability, Greenspan indicated.
"The enormous wave of mortgage refinancing, which ended only in the fall of 2003, allowed home owners both to take advantage of lower rates to reduce their monthly payments and, in many cases, to extract some of the built-up equity in their homes," he said.
Greenspan said that some of the cash from refinancing was used to pay down more expensive, non-tax-deductible consumer debt or to make purchases that would otherwise have been financed by more expensive and less tax-favored credit.
Several months into the effort of the Federal Reserve to switch from stimulative to neutral monetary policy through a slow but steady series of interest rate hikes, mortgage rates remain at historically affordable levels and single-family housing production and sales are poised to set new records this year.
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