[SeMissourian.com] Fair ~ 28°F  
River stage: 14.42 ft. Falling
Wednesday, Nov. 26, 2014

Greenspan: Housing market may be too hot, but economy is 'firm'

Friday, June 10, 2005

WASHINGTON -- The sizzling housing market may be getting a bit too hot, Federal Reserve chairman Alan Greenspan suggests.

Though the economy in general "seems to be on a reasonably firm footing," rapidly rising home prices in some areas do pose a risk to the housing boom, the Fed chief told Congress' Joint Economic Committee on Thursday.

Development of a national housing bubble, which could suddenly pop and send prices tumbling, doesn't appear likely, Greenspan said. But he said, "There do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels."

Even if house prices were to decline in some locations, Greenspan indicated the national economy would probably weather it without a "substantial" impact. The nation's banking and mortgage systems are less likely now than in the past to be impaired by "regional house price corrections," he said.

Mortgage spill

Greenspan said the situation in housing may have spilled over into mortgage markets. The dramatic increase in interest-only mortgages and the introduction of relatively exotic forms of adjustable-rate mortgages are of concern, he said.

"To the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace," the Fed chief said.

Even with the risks, "the U.S. economy seems to be on a reasonably firm footing, and underlying inflation remains contained," Greenspan said.

The Fed chief, in his most extensive remarks on the economy since February, gave a largely upbeat assessment of the country's economic health.

On Wall Street, stocks were lifted by his remarks. The Dow Jones industrials rose 26.16 points to close at 10,503.02.

Greenspan didn't signal a shift in the Fed's campaign to tighten credit -- as some analysts thought possible. Instead, he repeated Fed policymakers' stance that short-term interest rates can be raised at a pace that is likely to be "measured." Analysts have come to view that as gradual, quarter-point bump-ups.

Over the past year, the pace of economic activity has "alternatively paused and quickened," an uneven expansion that to a significant degree is related to the impact of gyrating energy prices, Greenspan said.

A recent pickup in economic indicators, however, suggested the economic pothole the country hit in early spring wasn't a harbinger of "a more serious slowdown," Greenspan said.

To keep the economy and inflation on an even keel, the Fed has boosted rates eight times -- each in quarter-point increments -- since June 2004. Analysts expect another increase June 30.

After that, opinions are mixed. Some believe the Fed will keep pushing rates higher through much of this year. Others think the Fed might pause temporarily in the later summer or early fall.

"The bottom line is that Greenspan is in no way signaling that the Fed's tightening ballgame against inflation is nearly over," said Stuart Hoffman, chief economist at PNC Financial Services Group.

A mixed employment report, released by the government last week, helped to fuel speculation that the Fed's credit-tightening campaign might slow or possibly stop.

Greenspan, however, clicked off statistics including the unemployment rate's dip to 5.1 percent in May, the lowest since September 2001, to buttress his point that the economy is in good shape.

On housing, one major factor contributing to the hot housing market is the low interest rate on the 10-year Treasury note, which influences longer-term mortgage rates.

Long-term rates have been falling even as the Fed has been pushing up short-term rates, a divergence Greenspan said is "clearly without recent precedent." The 10-year Treasury note is now around 4 percent, down from 4.8 percent when the Fed started raising short-term rates a year ago.

Greenspan said the unusual divergence of long-term and short-term rates is happening not only in the United States but in other countries, a puzzling phenomenon.

Among the theories Greenspan himself has floated and then discounted is that the low long-term rates are a sign of global economic weakness. But such rates were falling in 2004 when the global economy was growing at a sizable clip, he pointed out.

"The weakness argument has a certain credible ring to it, but when you begin to look at the details of the argument, it becomes less persuasive," Greenspan said.


Fact Check
See inaccurate information in this story?


Respond to this story

Posting a comment requires free registration. If you already have an account on seMissourian.com or semoball.com, enter your username and password below. Otherwise, click here to register.

Username:

Password:  (Forgot your password?)

Your comments:
Please be respectful of others and try to stay on topic.