Time to Applaud Rather Than Condemn Greenspan's "Housing Boom"

On August 26, Federal Reserve Chairman Alan Greenspan characterized the current "housing boom" as one of America's major "economic imbalances." The Chairman blamed the housing boom for everything from a low national savings rate to a burgeoning trade deficit, and he obviously wants the boom to end before long.

Greenspan's perspective are hard to fathom. The housing sector has been the brightest star in the economic skies and that star is still shining. For years, home sales and housing production have powered both GDP and job growth, and house price increases have created large amounts of wealth for America's homeowners-- fueling consumer spending in the process. Everything considered, housing has been responsible for as much as half of U.S. economic growth in an era when other components of the economy have turned in lackluster performances.

Chairman Greenspan once applauded housing's dramatic contributions to the economy and he steadfastly argued against charges of price "bubbles" in the U.S. housing markets. Maybe the Chairman has just become frustrated by the Fed's inability to raise long-term interest rates and take the starch out of housing despite more than a year of monetary tightening. Whatever the reason, perhaps the Chairman should take a step backward and recognize yet another benefit to be reaped by the "housing boom."

Hurricane Katrina seriously damaged the energy production and transmission infrastructure in the Gulf region, all but promising historically high energy costs for the foreseeable future. At a time like this, large amounts of housing equity-- created by those dratted price increases-- is a Godsend, providing a buffer to household finances and helping the economy weather the storm.

Comments

[Randy Noel]

Greenspan is ignoring the Gulf Coast and the aid coming from the federal budget and the amount of money is obscene. He needs to be fired now. The number 1 message from the victims of the recent hurricanes has been we want to go home. Housing is absolutely the number 1 priority in this country and Greenspan could not be anymore wrong in his assessment. We need a new more intelligent Fed chairman. First he tried to gut the GSE's and now he has no concept of the federal assistance needed in the South. The fed chairman that replaces him will be answering for his boondoogle in raising rates in the middle of a national disaster for years to come. Greenspan is anti-housing and has always been. Never before has someone in his position of power more effected the American people. He needs to go now!

[Gary Simons]

I am in the apartment and shopping center business, not the home business, but the same over-valuations exist in all real estate markets now. Rents have gone up about 4% per year here in L.A., while values have shot up 20% and more. And not for one year, but for several. This is a bubble, and all the arguments about supply and demand assume an informed demand-side. If the demand side was always informed about value, there could never have been an internet bubble nor any other bubble. No tree grows to the sky. The bloom always comes off the rose. The old adages are around for a reason - they hold a lot of truth. What is 100% clear is this: everyone will not love real estate this much forever. And whenever they stop, look out! The higher this goes, the harder it will crash. The only question is when. We're ready, are you?

[Michael Henderson]

Greenspan is right. Whoever thinks the real estate market can only go up should remember the crash in the early 90s - some houses in L.A., for example, lost 50% of their value. Japan had its crash 15 years ago and the house prices still haven't recovered. The problem lies with real estate investors (a.k.a. flippers) that keep speculating with the available homes, leaving other buyers with no choice but to pay more (or rent). They make their money. Homeowners get stuck with the bill for the rest of their lives. The sooner they realize this, the sooner the prices will fall.

[Jake Allen]

The housing speculation that has caused apparent "bubbles" has to have a foundation in something. Couldn't it be that the insecurities of the stock market have kept all the investors waiting on the sideline for a sign that the markets were actually capable of monitoring themselves. It seems to me that investment in the Dow or any other stock institution has not yeat earned the trust of investors. As such investment dollars must go somewhere. Real Estate has been the only shining star in our economy.

However, we now see buyers streching further then they ever have in the past just to obtain an ownership interest, which is the real cause for concern. When it becomes common place to accept an offer which has 100% financing with neg-am we as an industry are setting ourselves up for failure. Personally I am thinking of going into the foreclosure market in the next 2 years.

[S. Robert Kaufman]

The political statements of a political economist do not excuse us, the building industry, from checking our behavior in the light of the current market conditions so as not to hasten the self fulfilling prophesy our our Federal Reserve Bank sage. While it seems that there has been some slowing of the market here in the Washington D.C. area, it seems more to be a product of the price appreciation rather than any change in demand. This suggests that the builders, particularly some agressive national builders, have pushed up raw prices beyond rational formulas. Now if they change behavior dramatically, and significantly lower prices, they can create what looks like a stampede of price reductions that could suggest to prognosticators that the sky is now "really" falling. If builders are buying property based on expected appreciation or bidding up property just to keep market share, we may be building up pressure for a price relief valve. While the market fundamentals seem strong (job growth plus household formations), the aggressive price appreciation may be hitting their peaks. Now what do we do?

[Douglas Gilliland]

The housing boom continues to be the foundation of the American Dream. It is only when housing is lost like in the crisis in gulf states that we are reminded of its' importance. In some markets like Texas, housing prices are only mildly rising because of intense competition among builders. Mr. Greenspan's opinions are suspect when one considers his alienment with major lending institutions. Our goal should be to do everything we can to protect this critcial part of the economy from him or anyone else who attempts to weaken it.

[Robert Basile]

Boom or Bubble! Neither is good for our consumer, the industry or the country when done to an extreme. The current escalation in real estate prices in many parts of the country is not sustainable. Hopefully the change will be like a slow leak in a bubble or a moderate reduction in the volume so that our consumers, the industry and our country will not be shocked when confronted with economic reality, nothing goes up forever! Housing is and should be a great long term investment. It shouldn't be a great speculative investment. And it wouldn't be for long! There are not an unlimited number of buyers of speculative housing. Hopefully that will cause a soft landing in what has been a great ride for all involved in housing.