Greenspan sees housing bottom
WASHINGTON - Alan Greenspan usually surrounds his opinions with caveats and convoluted clauses. But ask his view of the government's response to problems confronting mortgage giants Fannie Mae and Freddie Mac, and he offers one word: "Bad."
In a conversation this week, the former Federal Reserve chairman also said he expects that U.S. house prices, a key factor in the outlook for the economy and financial markets, will begin to stabilize in the first half of next year.
"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he said. Tracing a jagged curve with his finger on a tabletop to underscore the difficulty in pinpointing the precise trough, he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond."
A long-time student of housing markets, Greenspan now works out of a well-windowed, oval-shaped office that is evidence of his fascination with the housing market. His desk, couch, coffee table and conference table are strewn with printouts of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.
An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said.
"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet - and hence banks' capital - until then."
At 82 years old, Greenspan remains sharp and his fascination with the workings of the economy undiminished. But his star no longer shines as brightly as it did when he retired from the Fed in January 2006.
Greenspan has been criticized for contributing to today's woes by keeping interest rates too low too long and by regulating too lightly. He has been aggressively defending his record - in interviews, in op-ed pieces and in a new chapter in his recent book, included in the paperback version to be published next month. Greenspan attributes the rise in house prices to a historically unusual period in which world markets pushed interest rates down and even sophisticated investors misjudged the risks they were taking.
His views remain widely watched, however. Greenspan's housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" - roughly 800,000 units above normal - diminishing soon. The other is a comparison of the current price of houses - he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas - with the government's estimate of what it costs to rent a single-family house. As other economists do, Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door.
"It's the imbalance of supply and demand which causes prices to go down, but it's ultimately the valuation process of the use of the commodity ... which tells you where the bottom is," Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It'll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level."