Housing Bubble
Greenspan: Housing bubble - potential problems but not serious ones
February 11, 2003
In today's testimony before the Committee on Banking, Housing and Urban Affairs, Chairman Allan Greenspan made positive comments on the current levels of mortgage debt and gains in residential real estate values.
He noted that overall growth was still driven by strong household spending but that the labor market remained soft. Productivity gains were seen as increasing household incomes despite this softness. These income gains resulted in advances in residential construction activity, which "moved up steadily over the year", and household expenditures.
The large extraction of built-up equity in homes which "partly" financed consumer outlays was noted as having changed over the year. While usually the result of realizing capital gains on home sales as a result of house turnover, this past year an almost equal amount reflected the debt-financed cash-outs associated with an unprecedented surge in mortgage refinancings. Mr Greenspan proposed that "such refinancing activity is bound to contract at some point, as average interest rates on outstanding home mortgages converge to interest rates on new mortgages." Although refinancing was seen as approaching a peak of activity, since there is a backlog of applications to process, refinancing origination's and cash-outs were expected to be significant, "at least through the early part of this year."
The Chairman accepted that the "mortgage debt of homeowners relative to their income is high by historical norms", however servicing requirements relative to disposable income was well below the high levels of the early 1990s as a result of low interest rates. Additionally, equity in homes had continued to rise despite sizable debt-financed extraction's due to "continued large gains in residential real estate values". As a result, "the total servicing costs faced by households relative to their incomes are below previous peaks and do not appear to be a significant cause for concern at this time."
After his testimony a question was raised regarding the sustainability of debt levels in the mortgage market and the danger of falling home prices.
Mr Greenspan reiterated that while the balance of debt in the mortgage market was "very large it is not, in our judgment, a cause of concern." Furthermore any risk would arise if "interest rates came back very sharply, which would presumably occur in the context of rapid economic recovery or accelerated inflation which I don't anticipate."
He accepted that the Fed would be concerned if the price of homes in general fell considerably and added "There was a good deal of concern about this housing bubble, but our evaluation of the data and outlook suggests that while obviously there are potential problems, they're not serious ones that need to be addressed in any material way, as far as we can judge."
The full text of Mr Greenspan's testimony is available online.
