Greenspan: Fed not to blame in housing crash
Home-price declines a possible U.S. Achilles' heel
By Inman News, Wednesday, May 13, 2009.By JOSEPH KIRSCHKE
WASHINGTON -- Since the end of his tenure as chairman of the Federal Reserve in 2006, Alan Greenspan has been harshly criticized in many quarters for failing to predict the monumental collapse of the housing market that began under his watch.
Speaking at a Real Estate Summit Tuesday during a National Association of Realtors annual midyear conference at the Marriott Wardman Park Hotel, Greenspan hit back, and denounced a "recalibration of financial history that I find very puzzling."
Long regarded as a "maestro" for guiding the economy and, by extension, the real estate market in more prosperous times, he was still greeted as such by hundreds of real estate brokers from across the country, with rounds of applause and standing ovations.
Greenspan said that easy access to money and credit through the Fed in short-term interest rates were not what spurred the growth in housing -- rather, it was long-term rates. Moreover, he asserted, the housing market began to surge in 2000 -- not 2001, when the Fed began raising interest rates, as critics contend.
"The issue of Federal Reserve policy," he claimed, was not "critical" to the failure of the housing market.
To a great degree, he added, many of the misfortunes of the American economy in general -- and the housing market in particular -- have also been driven "by human psychology" amid "extraordinary conditions."
"You cannot get too euphoric, and you cannot get too fearful," he said. "Prices of homes are a very ambiguous sort of thing."
Most importantly, he said, the potential for continuing declines in home prices "is, to me, the Achilles' heel" for an American economy that is "otherwise running extraordinarily well in recent weeks." ...CONTINUED
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Submitted by Ron Suponcic on May 13, 2009 - 1:52pm.
Greenspan is Way Off and Trying to Re-write History
The Fed's deceleration of mortgage credit is what burst the housing bubble and what continues to be our economy's number one problem. Rates on 30 year fixed rate mortgages have been fairly stable and meaningless for the last five years. Ignore them, most buyers did. In reality, the boom in the housing market was fueled by adjustable rate mortgages at 3.5%, some even lower. Then, almost overnight, the Federal Reserve's rapid increase in short term rates caused these ARMs to jump to 7%, effectively doubling the mortgage rates that were driving the market. This "deceleration" was a shock that the economy could not overcome. Poor underwriting and "sub-prime" loans are minor issues compared to the shock of doubling the average mortgage rate, so these issues were simply aggravating factors and not the cause of the problem. This interest rate shock caused buyers to disappear overnight and left sellers with no time to adjust. The resultant rapid decline in market values left no options for sellers other than short sale, foreclosure, or bankruptcy, which compound the problems. Had the Fed decided on a strategy of very gradual short term rate increases rather than being pressured by imaginary fears of inflation, they would have allowed for a controlled deceleration of mortgage credit, and we would have avoided many of the problems we now face. I like to compare what the Fed did to driving a car on the highway. Driving at 70mph is normal, but the Fed brought the speed up to 90mph with short term rates that allowed for 3.5% ARMs, which is fine as long as you slow down before exiting the highway. However, the Fed decided to take the Inflation Blvd. exit at 90mph and crashed us into a wall. It's not the speed that kills you, it's the deceleration and impact that kills you.
Submitted by Sean OToole on May 13, 2009 - 2:52pm.
I'm not sure it is an attempt to rewrite history, I think he still believes in a mythical model of the economy that has nothing to do with reality. Unfortunately I think is predecessor and our new Treasury Sec suffer many of the same hallucinations.
Pretty simple concept that prices rise to meet demand. And in the case of highly leveraged purchase like real estate demand is largely determined by ability to pay... after all "everyone" wants to be a homeowner, its the American Dream. So when we offer ridiculous loan products that temporarily inflate affordability to 2-3 times previous levels it should have surprised no one that prices rose to match.
I like Ron's analogy, but unfortunately we went from 55 to 120, and this car was going to crash regardless as few of these loans were really sustainable.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Marty Boardman on May 13, 2009 - 4:35pm.
As usual Sean your post is right on. It all comes back to affordability. From 2004-2007 average Americans were buying above average priced homes, which resulted in above average mortgage payments. But, they were earning average to below average incomes. Something had to give.
Marty Boardman
Choice Loan Consulting
my blog: www.freerealestateeducation.com