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August 26, 2005
Greenspan: Housing Boom Is An Imbalance
August 26, 2005, CBS Marketwatch -- In his sharpest words to date about rising home prices, Fed chief Alan Greenspan described the housing boom as an economic imbalance that could end badly for the economy. In prepared remarks to the Jackson Hole Fed policy conference, Greenspan said high home prices were due in part to low risk premiums demanded by investors. Such increases in asset values "are too often viewed by market participants as structural and permanent." "History has not dealt kindly with the aftermath of protracted periods of low risk premiums." Read his remarks. Greenspan warned asset values could fall if investors grow cautious and demand higher interest rates. "What they perceive as newly abundant liquidity can readily disappear," Greenspan said. "Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices," Greenspan said. Greenspan said the flexibility of the economy is the most important policy asset in handling any shocks from a fall in asset values. He expressed optimism that the adjustments could be made gradually and a recession could be avoided.
Housing boom is an imbalance: Greenspan [MarketWatch]
Comments
Might be a case of too little, too late. The interest-option negative amortization loans, the interest-only loans, the 125% financing loans, and other "exotic loans" as Mr. Greenspan calls them, have proven very popular the last couple of years as housing prices skyrocketed. You can argue that the borrowers should have known better, but I fear a lot of the regular Joe's out there will get burned badly if housing prices fall.
Posted by: DN at August 26, 2005 10:34 AM
Here in CA the zero-down, interest-only 80/20 is the STANDARD loan and isn't considered exotic in the least.
Posted by: Sassy at August 26, 2005 10:54 AM
The only legitimate fingerpointing here should be right back at the Fed for counterfieting U.S. dollars. Blaming lenders for being irresponsible, in this case is like blaming children when they imitate their parents bad habits.
http://www.mises.org/story/1859
Posted by: iceberg at August 26, 2005 12:49 PM
The only thing that is imbalanced is Greenspan himself.
Posted by: Anonymous at August 26, 2005 1:21 PM
I'm not sure who bears the blame: exotic loan borrowers, lenders, the Federal Reserve, real estate speculators, Chinese government officials financing the Bush Administration's massive budget deficits, etc etc. On the one hand, I think taking personal responsibility is important. If you make a bad financial decision like taking on an I/O mortgage at what proves to be the top of the market, then you have to accept the consequences. On the other hand, I'm not saying that everyone who has an I/O loan is a bad person, so I don't wish ill on anyone.
Posted by: DN at August 26, 2005 2:19 PM
Barbara Corcoran stepped down from The Corcoran Group last Friday. Did she signal the market peak? Ha ha
Posted by: JD at August 26, 2005 2:27 PM
Take the blame? Take the BLAME??!!! For what? Nothing has happened. This is what's so crazy about the media bubble about the real estate bubble: The gloom and doom predictions have been put forth for literally years now...but there hasn't been a turnaround. Has anyone heard of a mass of ARM defaults? Have prices gone down in the last year? Or even flattened? No! But there are people writing about "blame"; as though all those Volvo-driving, Platinum-card holding, new construction-condo owning yuppofiles are lining up to jump into the East River. Wishful thinking? Sour grapes? The real estate rhetoric gets ever weirder. The Fall market will tell the tale. I, for one, think it will be robust. There are still many, many people out there looking for a place to live in NYC. Have prices outpaced the wealth of the market? Could there be more inventory as properties remain on the market longer? Sure. I think a price correction could be good for NYC real estate. But a price correction is hardly an economic disaster. Just watch how prices hold up. The slightest down tick in listing prices will bring the buyer masses back in droves (if they ever left in the first place). See you in September.
Posted by: synonymous at August 26, 2005 2:41 PM
I guess it was a joke, but it's kind of unnerving to see an ultimate real estate "insider" like Barbara Corcoran move on. Now, we have Greenspan talking about the "froth" and "imbalance" of the current housing boom.
Posted by: Bill at August 26, 2005 3:02 PM
"Sassy" wrote about the San Diego, CA market having gone from frenzied over-bidding to tumbleweed open houses and developers' offers of free plasma screen TV's in about 6 months. Maybe tough coop boards make that unlikely to happen in NYC, but even a moderate price correction won't be a breeze if a homeowner (or flippers) has 0 equity, a zero or negative amortization loan, and is counting on continued sharp price increases year after year to make it all work.
Posted by: DN at August 26, 2005 3:09 PM
Synonymous, where were you during the tech boom and bust? Did you ever pick up a newspaper? Your arguments barely touch the surface.
"Has anyone heard of a mass of ARM defaults?" - Not yet, because according to most economists, the peak has hit this year. Check out the ARM holders in a few years, when their payments rise. Meanwhile, foreclosures are rising in many bubble markets.
"Have prices gone down in the last year?" - again, read. They're starting to in a lot of "overvalued" places, and homes are sitting longer. Real estate is not like tech. This won't happen overnight.
"..all those Volvo-driving, Platinum-card holding, new construction-condo owning yuppofiles are lining up to jump into the East River." - many of those folks are rich, true, but ask how many of them put no money down on those condos and have IO or ARM mortgages - if there is a price correction and they have to sell, they make NOTHING. They have NO EQUITY. If they own, ask how many took out massive home equity loans to afford those goodies and have leveraged themselves to the hilt. Then ask them how much they have in their savings account - yes, real cash, which people seem to have forgotten about.
"I think a price correction could be good for NYC real estate. But a price correction is hardly an economic disaster... The slightest down tick in listing prices will bring the buyer masses back in droves..." - there will be some who think a small drop is great and we should see another surge of buyers. But remember that a lot of first time buyers will still be priced out, even with a slight correction (say 2-3%), because interest rates could keep rising. It's how the mania works.
What I really love is that everyone thinks all renters have sour grapes. Some can well afford to buy into this market but have chosen not to because they are saving money instead (renting is still cheaper than buying in many places, including NYC). And there are a lot who cashed out and chose to rent.
Maybe all the talk is just talk, but only time can really tell, and when Greenspan is talking, you should listen. How long did the stock market crash after he indicated things were out of control?
Posted by: Anonymous at August 26, 2005 3:45 PM
suddenly brokers who would'nt return my calls are blowing up my email...hmmmmm...happening to others?
Posted by: Anonymous at August 26, 2005 5:34 PM
Comparing the real estate market to the tech boom and bust is probably the most frustrating form of real estate bubble-speak. These two markets are completely and totally different. The machinations business journalists go through to fit a square peg in the round hole of their arguments are laughable. My favorite form of sidelining, though, has to be the wiggle room all you doom and gloomers give yourselves. "Check out the ARM holders in a few years." In a FEW YEARS? Wow, you're really going out on a limb. But you're in good company. The economist in the Times article the other day who called the (you guessed it) dot-com bust predicted that some time in the next TWO YEARS we might see a big correction in real estate.
The sky is falling. The sky is falling. These posts take it even further: The sky (for them) has already fallen and it's time to lay the blame somewhere.
Hey, Anon, here's an August 24th headline: New Homes Sales Jump 6.5%
Renting is dumb. If you're paying $2,000 a month on rent, you're guaranteed to lose almost $100,000 over the next four years with no chance of ever turning your losses around. That money? She's gone...
And I didn't buy my apartment as an investment. I bought it because it's a better place to live. Rental buildings are notoriously filthy and poorly maintained. No incentive for the renters to treat the property nicely. Not much incentive for the landlord to spend a lot on maintenance. What a bummer.
[BTW: NYC has the lowest percentage of investor-owned property in the country. See, I do read.]
We bought our place 6 years ago for $219K. Think I should have stayed a renter? Really think you should? Let's talk about THAT in a few years.
Posted by: synonymous at August 26, 2005 5:47 PM
You were just in the right place at the right time when you bought 6 years ago.
I for one was very young and had no money 6 years ago. Now that I am ready and able to buy, I cannot afford anything that fits my medium to long term needs. Believe me, I (and many other would-be first time buyers I am sure) would really love to be able to buy even in this inflated market because yes if you look at this in a long time frame of 20-30 years, one will win buying versus renting. However, we just dont have the money and that is that and eventually the bottom will fall out of the market PARTIALLY because people like me cant buy.
As such I find your comments a bit disingenuous and insensitive.
Posted by: Anonymous at August 26, 2005 6:47 PM
Like "synonymous" I bought several years ago, so it's NOT like I'm cheering for a bubble burst. A bust would send much of my net worth into smoke. I'm crossing my fingers that with Mr. Greenspan intent on continuing to raise the Fed Funds rate, some of what he calls froth will ease and his warning on risky lending practices is heeded. It would be great if housing prices were to rise in sync with incomes.
Posted by: Anonymous at August 26, 2005 6:59 PM
The problem is not that houses are more expensive. The problem is that they are out of line with personal income and with rents. But, do a chart of housing costs in oil terms, or adjusted to silver. This could just be inflation at work. It doesn't ever hit everything at once. Wages may follow right behind.
IMHO: the media doesn't like a GOP admin very much. We have right now much higher growth then we have had since the end of Reagan's term. I think that has been played down tremendously. For example, read Krugman today. His figures are bad and his logic is demented, but he has an audience. That influences everyone, even the Fed Board of Governors. I think that inflation is just going unhinged and we're not on top of it b/c of all of the negative press. Ten years from now we'll look back and ask why the Fed was so slow to combat inflation.
Posted by: JoshK at August 26, 2005 7:06 PM
With all due respect, when home prices have "become" so out of line with rents and incomes, it is because they are more expensive and income and rent have not caught up.
Posted by: Anonymous at August 26, 2005 10:48 PM
Hey Synonymous, I'm also a renter and can very much AFFORD to buy. That's not the issue for some people. But apartments are no longer 200Gs (if they were, I'd buy one and be rich - a 200G mortgage is a pittance and well below my rent - you're not some financial genius for buying at that price). To get something at all what I want, I'd be spending about 800Gs or more. While I can afford that, why should I? Like someone else said, owning doesn't always make more sense. My rent is a bit over 2Gs now. Even with a sizable downpayment and the "tax breaks" I still come out in the hole if I own. Owning a 2 bedroom condo or co-op is stupid for me, considering I would like some kids eventually and they need a place to sleep. Plus, my savings account just grows and grows. My net worth is well above what it would be if I owned a home right now.
Moreover, my rental is beautiful, huge and well maintained...it's a lot nicer than what's available to buy for the same amount. I think a lot of the landlords on this site would disagree that their brownstone rentals are dirty and gross. You can't make a blanket statement like that, especially in such a diverse market at NYC.
PS, where did you get that headline that homesales jumped? It may be, but it seems pretty contrary to all that I've been reading.
Finally, I just want to point out that acting like you're so special because you bought years ago doesn't mean you're great...just older.
Posted by: Anonymous at August 27, 2005 9:52 AM
"Finally, I just want to point out that acting like you're so special because you bought years ago doesn't mean you're great...just older"
100% agreed! So many people seem to think they're geniuses because they bought a home 5/10/15/etc years ago. I would've bought then, too... but I was in high school, undergrad or grad school. It's a bit difficult for folks like us to have bought homes when we couldn't afford ramen.
Posted by: Anonymous at August 27, 2005 1:11 PM
Most of the posters here are probably far too young to remember the late '80s and early to mid '90s real estate market in New York City.
I bought a classic six a block from Central Park West in '89 for the now laughable price of $380K. But I wasn't laughing in '95 when, after losing a job, I couldn't find a buyer for that beautiful place at any price. No one and I mean no one was interested at the time. I ended up getting foreclosed and saw my previous impeccable credit rating shot to hell.
According to an article in a recent NY Daily News, residential RE in NYC dropped by like 45% from the peak in '89 to the bottom in '95. Great timing on my part--and I had 30% down payment/nonexistent equity.
A old real estate pro told me, "In real estate, you don't make money when you sell, you make it when you buy." Which I guess means you may not do so well if you buy after five years of ever increasing prices.
Posted by: Anonymous at August 27, 2005 2:43 PM
"For example, read Krugman today. His figures are bad and his logic is demented, but he has an audience. That influences everyone, even the Fed Board of Governors."
I nearly spit out my soda all over the monitor when I read that. Thanks for the biggest laugh I have had all day. I'm sure Krugman will be happy to hear that he is directly influencing US monetary policy.
Posted by: anon at August 27, 2005 5:11 PM
"Renting is dumb. If you're paying $2,000 a month on rent, you're guaranteed to lose almost $100,000 over the next four years with no chance of ever turning your losses around. That money? She's gone..."
Not really a fair statement. In the same sense: Closing costs, interest, re taxes, maintenance. That money? She's gone.
You might be saying, "Yeah, but I will get that money back when I sell the place, and you have no way to get that back when you rent! Ha!" Um, you need to compare apples to apples. By renting I am saving a considerable amount of money, both in upfront costs, and in monthly carrying costs. Just as you can make up your losses through appreciating real estate value, I can make up my losses by investing the money I am saving. I am pretty confident that in 5 years, my investment of money saved by renting will outperform your returns on real estate. And remember, the $ you make on real estate isn't computed by subtracting what you get from what you paid. You also have to subtract any and all costs associated with the property (see the list above). Compare apples to apples, and renting doesn't look so dumb, at least in the current market.
The only rational price for real estate is the present value of all future potential rental income. Right now, the numbers don't add up. Maybe six years ago, they did, and you made the right decision, based on the numbers. I applaud you for making the rational decision, but don't tell me I am dumb because today's numbers don't warrant the same course.
Bottom line, there is no such thing as a 100% sure thing investment. It doesn't exist. Don't trust anyone that tells you any differently.
Posted by: Renter at August 27, 2005 5:29 PM
For the poster before who thought that...
"I nearly spit out my soda all over the monitor when I read that. Thanks for the biggest laugh I have had all day. I'm sure Krugman will be happy to hear that he is directly influencing US monetary policy."
You have to remember that no one person directly influces their policy, but you can read the archives of their discussions. You may be surprised to find that they are human beings and are influenced by everything, including what is repeated often in the media.
Posted by: JoshK at August 27, 2005 9:51 PM
To Anon 2:37pm, I remember the housing bust of the 1990s, but I'm surprised to hear that your Classic Six near Central Park didn't sell. I recall comments that the market for large, prewar apartments remained liquid, but that people couldn't sell studio's or 1 bedroom's. (Parents of a friend of mine bought an UWS studio in their coop building for $25,000 in 1993. They used it for guests. Early this year, they sold it for $495,000.) Obviously, you lived through the experience firsthand, so it's chilling to read. Yikes.
Posted by: DN at August 30, 2005 1:53 PM
just a few notes from an insider with a large pulse on the market:
there will be 3 trillion dollars of real estate switching over to a variable rate in 2006. in 2007 that number almost doubles....that is when we will see many, many foreclosures. the I/O were good while they lasted, hopefully things stay steady.
two: houses ARE sitting on the market longer. The first sign that people are wary. Offers are starting to come in below asking in certain areas. It definitely will hit certain neighborhoods first, where the prices were speculatroy to begin with. neighborhoods on the "fringe" may just stay that way. While hot, gentrified areas will feel the pinch less...
bankruptcy lawyers are salivating as are foreclosure companies waiting for the shoe to drop.
I will say that there is no BUBBLE. Real estate continually outperforms other investments... instead of homeowners seeing the (ridiculous) returns of up to 25% in under a year, it will go back to the normal 4%, maybe 8%... is that a bubble? No. It is as mister greenspan says, a settling... it's like a cappuccino to all you yuppies.... the froth is just gonna settle... but you still have a yummy cappuccino... real estate is and will alwasy be a safe investment...
Posted by: brooklynreguy at August 31, 2005 11:30 AM
And what about quality of life? I think I'd rather rent in a nicer(inmo) nabe then to own in some nabe I hate. I may lose money in rent but at least I am not spending it in therapy and meds.
Posted by: Anonymous at September 1, 2005 3:56 PM
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