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| Greenspan Doing His Part to Drive Home Prices Down Further |
| Written by Jonathan Smoke | |
| 09.21.2007 | |
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Discuss this article on the forums. (0 posts) Anyone else out there perplexed by the once-powerful and almighty Greenspan saying that the housing bubble was clearly caused by low long-term interest rates and that the Fed was powerless to stop it?  While it is true that their federal funds rate cuts and increases didn’t seem to move 15 and 30-year rates much, during the boom/bubble it was a surge in subprime, Alt-A, and ARMs that coincided with speculation frenzy and overbuilding and a huge surge in the homeownership rate. Now I suppose that low long-term interest rates fueled the thirst for leveraged funds investing in securitized mortgages led primarily by the above because of their perceived returns and relatively low risk, but his language makes it sound like the boom occurred because buyers had low long-term rates.That hypothesis was already proven wrong by some of Greenspan’s former colleagues. Look at my post on home ownership, which highlighted the 2006 research paper, “The great turn-of-the-century housing boom.” In the paper, published by the Federal Reserve Bank of Chicago, economists Jonas D. M. Fisher and Saad Quayyum reviewed the various factors that could have contributed to the housing boom and concluded it wasn’t loose monetary policy, and their statistical analysis shows that interest rates did not explain the bubble. Maybe this is just Greenspan’s way of protecting his legacy and saying he didn’t cause the housing bubble. Whatever his rationale, his words, now being rapidly picked up and reported by media outlets, will drive further concern into consumers that home prices will fall further. Believing is seeing. By our recent price forecast simulations, we’ve concluded that 225 of the 361 MSAs in the states, or 62% of major markets, have at least a 50% chance of seeing home price declines through 2008. If enough weekend TV news shows and newspapers talk about Greenspan, I’d wager that the psychological impact will make those numbers worse. The futures markets are already betting on that development. Look at the futures Housing Price Curves as of September 18 from TFS Derivatives Corp. Albeit on thin volumes, now that longer term home price contracts are being traded, we can see that the negativity stretches well into the future for the big eastern and western cities. The angle of the slide from November 07 to one year out is particularly steep. I’m not sure if the inherent stickiness of home prices can resist these overwhelmingly negative forecasts. Buckle up, as it looks like this roller coaster ride is going to get even wilder. 
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