Greenspan cited three factors behind his relative optimism about housing prices:
- First, the process of moving out of a home and paying substantial brokerage fees and taxes “greatly discourage the type of buying and selling frenzy that often characterizes bubbles in financial markets.”
- Second, “any bubbles that might emerge would tend to be local, not national, in scope,” because local conditions prevail over the housing markets in the U.S.
- Third, there is no current oversupply of newly built homes. “The level of overall new home construction, including manufactured homes, appears to be well supported by steady household formation and not dependent on high and variable replacement needs or second-home demand. Census Bureau data suggest that one-third to one-half of new household formations in recent years result directly from immigration.”
Although Greenspan went out of his way to squash speculation abut a bubble in housing prices, it was a single sentence from the 30-minute speech that caught the attention of the media and rattled Wall Street. “Clearly, after their very substantial run-up in recent years, home prices could recede,” he said before quickly adding, “A sharp decline, the consequences of a bursting bubble, however, seems most unlikely.”
Greenspan said that, “the five-year old home building and mortgage finance boom is less likely to be defused by declining home prices than by rising mortgage interest rates.”
But if interest rates should rise, that would be a sign “of a more vigorous upturn in the pace of business activity,” he said. And a faster growing economy would be generating more jobs and income that would limit the possibly adverse impact of higher mortgage interest rates on housing.
Responding to the Fed chairman's remarks, NAHB Executive Vice President and CEO Jerry Howard said that, “all signs point to another very good year for housing, although the pace of construction and home sales may slow down a bit from last year's record pace. We have asserted for the past year that speculation in the news media over the possibility of a crash in housing prices was speculative journalism at its most reckless. Chairman Greenspan's latest pronouncements discounting the possibility of a housing bubble ought to put the public's mind to rest on this disquieting issue.”
To read Greenspan's speech in its entirely, click here.
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