Greenspan says U.S. home prices will probably bottom by end of 2008

Posted Apr 8th 2008 1:01PM by Joseph Lazzaro
Filed under: Forecasts, Housing, Federal Reserve, Recession

Former U.S. Federal Reserve Chairman Alan Greenspan predicted that the decline in U.S. home prices will probably end "well before" early next year, as the home inventory supply declines, Bloomberg News reported Tuesday.

Further, Greenspan sees most of the excess inventory eliminated in early 2009, with home prices stabilizing "well before that."

U.S. home inventories total a 9.5- to 10-month supply, at current sales rates, depending on the survey. A normal home sales market typically has a 3-4 month supply.

Revisionist critique

Generally recognized as one of the premiere central bankers in the modern era, Greenspan's legacy and policies have been subject to revisionist criticism, largely as a result of the U.S. housing recession. Critics charge that the Greenspan-led Fed lowered interest rates too much to stimulate the U.S. economy following the September 11, 2001 terrorist attack on the United States. The over-stimulation, critics argue, led to the recent housing bubble. Second, critics say the Fed did not prudently exercise its regulatory power, which led to a collapse in underwriting standards, and the record mortgage defaults that precipitated the credit crunch following the bursting of the housing bubble in 2007.

Greenspan has countered by arguing that the housing bubble -- indeed bubbles themselves -- are endemic to economic growth and cannot be 'prevented,' The Wall Street Journal reported Tuesday (subscription required).

Greenspan called criticism that he had allegedly favored adjustable rate mortgages -- one of the key elements in the housing sector's unwinding -- over 30-year, fixed-rate mortgages, "in all seriousness . . . really quite unfair." In fact, Greenspan says, all he was doing at the time was pointing out that many people with 30-year fixed rate mortgages move or refinance long before it is mature, The Journal reported.

Economic Analysis: To date, the revisionist's critique of former Chairman Greenspan has not been fair. At the time Greenspan started to lower rates in 2001, inflation was declining and the major concern was deflation, not inflation. Further, Greenspan's critics need to examine what other structural economic factors -- factors outside the Fed's control -- contributed to many homeowners' decisions to access home equity. The answer to that question may identify a major deficiency in the U.S. economy and simultaneously place blame for the current economy's woes at its authentic source, and not with the former Fed chairman.

Tags: credit crisis, credit crunch, featured, Fed, Greenspan, home prices, housing, housing bubble, interest rates, monetary policy, mortgages, U.S. Federal Reserve

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Reader Comments (Page 1 of 1)

4-08-2008 @ 1:45PM

David Huston said...

Actually, it was clear to me (and therefore must have been crystal clear to professional economists) at the time that Greenspan starting pushing adjustable rate loans, that such a recommendation was fraught with risk and his clear suggestion as FED chief that prospective home buyers employ ARMs was very surprising and questionable at the time.

4-08-2008 @ 3:24PM

david said...

i think Greenspan should shut up he has already caused enough problems and what;s more does not want to acknowledge that the current crisis is a result of his actions when he was Fed Chairman

4-09-2008 @ 12:20AM

thebigkill said...

Greenspan is either more clueless than I ever imagined a Fed chairman should be or he's lying through his teeth.

Everyone knows income growth has everything to do with the home price. If median incomes are higher, people can afford more house. How can he say home prices will bottom when jobs are contracting, particularly high-paying financial and construction jobs? What a bonehead play.

Home prices only rise when we see income growth, which only during good economic times. I don't see a bottom until at least mid-2009. The price-to-income multiple is still insane on a nationwide basis. Greenspan should be ashamed for illustrating ignorance or deceit by saying a housing bottom would happen in the facing of decelarating income cash flows and while foreclosure growth is still increasing its momentum.

I would highly recommend reviewing the IMF's 2008 World Economic Outlook.