[A-List] Greenspan Calls Home-Price Speculation Unsustainable

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

Greenspan Calls Home-Price Speculation Unsustainable (Update3) 
http://quote.bloomberg.com/apps/news?pid=10000006&sid=ajYPxb8Ojdio&refer=hom
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May 20 (Bloomberg) -- Some regions of the U.S. housing market show signs of
unsustainable price speculation and ``froth'' from rapid sales, Federal
Reserve Chairman Alan Greenspan said. The surge may ease as homes become
less affordable, he said. 

``It's pretty clear that it's an unsustainable underlying pattern,''
Greenspan said in response to a question after a speech on energy to the
Economic Club of New York. ``People are reaching to be able to pay the
prices to be able to move into a home.'' 

``There are a few things that suggest, at a minimum, there's a little froth
in this market,'' Greenspan said. While ``we don't perceive that there is a
national bubble,'' he said that ``it's hard not to see that there are a lot
of local bubbles.'' 

Greenspan's comments represent some of his strongest language to date on
rising home prices. Fed Governor Donald Kohn said in an April 22 speech that
rising home prices now ``raise questions.'' 

Combined sales of new and existing homes, townhouses and condominiums set
four records in each of the past four years, aided by low mortgage rates.
The median price of a previously owned home in March rose 11 percent from a
year earlier, the biggest 12-month gain since December 1980, according to
the National Association of Realtors. Sales of new and previously owned
homes are expected to total 7.87 million this year, trailing only last
year's record, the group predicts. 

Investors 

A national bubble is unlikely because the U.S. real estate market is
composed of individual regions with different pricing trends, making a
collapse that damages the overall economy unlikely, Greenspan said. Home
purchases and sales also have high transaction costs, making it hard to
speculate, and most people buy homes to live in, he said. 

Even so, Fed economists have determined that second home purchases are
partly responsible for driving up the ratio of sales to the existing housing
stock, Greenspan said. Because buyers could sell without facing relocation
costs, the Fed chairman said the more rapid pace of second home purchases
may reflect speculation in some markets. 

A survey of the Realtors group released March 1 found that 23 percent of
homes sold in 2004 were purchased by investors. Nearly 4 in 10 Americans
said it is at least somewhat likely the housing bubble in their market will
burst within three years, according to a May 13 Experian/Gallup Personal
Credit Index poll. 

``When you get speculation, there are only a couple of ways for it to end,
and they are not good,'' said Jay Mueller, senior portfolio manager at Wells
Capital Management, a Menomonee Falls, Wisconsin-based division of Wells
Fargo & Co. ``We are nowhere close to income growth matching house price
appreciation.'' 

`Simmer Down' 

There's a risk that consumer consumption may decline if the housing market
slows, Greenspan said. ``If it occurs, and eventually it will, it will
reduce the fairly large and still accelerating degree of extraction of
equity from existing homes,'' he said. ``This has been a major force in
financing consumption expenditures.'' 

While Greenspan didn't explain why he expected the surge in home prices to
``simmer down,'' he noted that buyers have to resort to unusual financing
techniques, such as interest-only loans, to afford homes now. 

There is ``considerable unlikelihood of a major decline'' in prices because
that's ``very rare'' in the U.S., Greenspan said. 

``Even if there are declines in prices, the significant run- up to date has
so increased equity in homes that only those who have purchased just before
prices literally go down are going to have problems,'' he said. 

Fed's Role 

Earlier this week the Fed and other banking regulators warned banks that
they should tighten controls on home equity loans that they said are too
often offered with no documentation of a borrowers assets. 

``That kind of moral suasion approach should probably have been done two
years ago,'' said John Silvia, chief economist at Wachovia Corp. in
Charlotte, North Carolina. ``It is very hard for them to jack up interest
rates to deal with this, but they can get tougher on their guidance.'' 

Economists such as Stephen Roach of Morgan Stanley have said the Fed helped
cause housing and other asset prices to soar by keeping its policy rate at 1
percent for the year ending June 2004, the lowest since 1958, and then
raising rates slowly. 

One result of the Fed's ``measured'' pace of rate increases is that
long-term bond yields, which set the basis for many mortgages, have stayed
low. Yields on 10-year Treasury notes are about 4.12 percent, down from
about 4.7 percent a year ago. 

The rate on a 30-year fixed mortgage this year has averaged 5.78 percent,
close to the four-decade low of 5.21 percent that was reached in 2003,
according to mortgage purchaser Freddie Mac. 

Regional Prices 

David Berson, chief economist at Fannie Mae, said in a report this week that
the affordability of homes in some regions is at its lowest level since the
mid-1980s because of huge prices increases. Nationally, housing
affordability, a function of prices, mortgage rates and income growth, is in
the middle of its 10-year range. 

The median selling price of a previously owned home rose to a record
$195,000 in March, the latest statistics from the Realtors group showed.
Previously owned homes account for 85 percent of the residential real estate
market. 

Three metropolitan regions in Florida led the nation in price growth,
according to the group. The strongest price increase was in Bradenton, where
the first-quarter median price of $275,000 was 46 percent higher than the
same period in 2004. 

`Hot Spots' 

In the San Francisco Bay area, the nation's most expensive region for homes,
the median price was $689,200. 

``The housing market doesn't have a regional problem; it has localized hot
spots,'' said Robert Brusca, president of Fact & Opinion Economics in New
York. 

The Standard & Poor's Supercomposite Homebuilding Index, which rose 64
percent in the past 12 months, fell 0.7 percent today. Shares of builders
Meritage Homes Corp., Toll Brothers Inc. and KB Home have all more than
doubled in a year. 

Greenspan's housing comments came after a speech on energy prices. The Fed
chairman said businesses and consumers are already changing investment and
purchasing plans to adapt to higher energy prices and will eventually
increase energy efficiency in the U.S. 

``With energy prices again on the rise, more rapid decreases in the
intensity of use in the years ahead seem virtually inevitable,'' Greenspan
said. 

The following table shows the median price of previously owned homes rose
9.7 percent, to $188,800, in the first quarter from the year-earlier period,
according to the National Association of Realtors' Metropolitan Area Price
report: --With reporting by Vince Golle and Kristy McKeaney in Washington,
and Howard Liberman and Bernardo Soriano in New York. Editor: Miller