Greenspan: Housing Market Bubble Bursting 'Most Unlikely'
WASHINGTON, D.C. - Most homeowners -- 75 percent of them -- have a 20 percent or greater equity stake in their homes and that's plenty to cover a significant drop in home prices.
However, the vast majority of homeowners needn't fear big price drops because such an event will likely occur only locally. Economic diversity holds sway over statistical models that predict a nationwide home price drop.
That's according to Federal Reserve Chairman Alan Greenspan who in a recent speech repeated a refrain that punches holes in theories that the housing market is an overinflated bubble about to burst.
"These concerns cannot be readily dismissed. Debt leverage of all types is often troublesome when one judges the stability of the economy. Should home prices fall, we would have reason to be concerned about mortgage debt; but measures of household financial stress do not, at least to date, appear overly worrisome," he said in a speech before the America's Community Bankers Annual Convention this week.
Greenspan said 75 percent of all outstanding first mortgages were originated with a loan-to-value ratios of 80 percent or less and when all mortgages are considered the loan-to-value ratio is about 45 percent, giving the nation, as a whole, a 55 percent equity stake in residential real estate.
"It would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity," he told conventioneers.
Greenspan said housing price bubble theories also assume there is too much speculation in the market and that home buyers are looking at homes as get-rich-quick investments, but in reality expensive buying and selling fees and the need to have a roof over one's head prevent such conditions.
He said investors accounted for only 11 percent of the total home mortgage originations in 2003 and represent a small fraction of the overall housing market.
"Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," Greenspan said.
He did voice concerns about the rapid run up in household indebtedness which has outpaced income growth. And the chairman does agree that home price appreciation will slow down from its frenetic pace of recent years.
"Most analysts, even those who do not foresee a mounting bubble, anticipate a slowdown in both home sales and the rate of price increase...If house turnover and price increases both slow, and presumably mortgage debt extensions on new homes do as well, increases in home mortgage debt will slow. Outright declines in mortgage debt seem most unlikely. Home mortgage debt has increased every quarter since the end of World War II."
He also said:
"Indeed, the surge in cash-out mortgage refinancings likely improved rather than worsened the financial condition of the average homeowner. Some of the equity extracted through mortgage 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," Greenspan said.
"In addition, a significant decline in consumer incomes or house prices could quickly alter the outlook; nonetheless, both scenarios appear unlikely in the quarters immediately ahead. If lenders, including community bankers, continue their prudent lending practices, household financial conditions should be all the more likely to weather future challenges," he concluded.
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