PrintAugust 14, 2008
Greenspan sees housing crisis easing next year
Alan Greenspan hasn't been idle since he retired as chairman of the Federal Reserve. Greenspan has been busy defending his record from those who charge that his lax regulatory policies and artifically low interest rates contributed to today's housing crisis.
The former chairman points out that a series of globally influenced events were largely responsible for the meltdown:
Mr. 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. Mr. 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.
The key, Greenspan believes, is home equity. This is what gives investors collateral for mortgage backed securities that is the engine of prosperity for the world. But with housing prices in free fall, that equity is no longer a certainty. Hence, the downturn as banks close off credit.
He believes the crisis is nearly over, that prices should stabilize sometimes next year:
Mr. 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, Mr. 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," Mr. 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."
Perhaps not surprisingly, Greenspan opposes the bailout of Freddie Mac and Fannie Mae, believing that the government took the wrong course with the mortgage giants. He believes the Bush administration should have stiffed the shareholders of both institutions, had the government take them over, and then carve them up into several different agencies so that they could be auctioned off to private investors later.
Fascinating read.
