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Department of Equivocation
Being Chairman of the Federal Reserve is sort of like the reverse of being a blogger -- you need to be very, very, very careful about every word that passes through your lips lest an unintentional slip create a financial panic. Thus, Greenspan's thoughts on housing are a true classic of the genre:
"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown.No bubble, but many small, local bubbles. Hence an overall froth. And, presumably, a bubble here in Washington, DC, where prices have gone up a lot. From the standpoint of self-interest, this seems to me to be the best possible outcome since a decline in local home prices would be give for me as a non-homeowner who plans on sticking around town for a whle, but a nationwide collapse would have all sorts of bad spillover effects. Therefore, I choose to believe that Greenspan's called this correctly.Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country.
Via Alina Stefanescu who notes that the equivocation has thrown the nation's headline-writing industry into crisis.
May 23, 2005 | Permalink
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» The Frothy Housing Market from It's Recess-time Somewhere
Greenspan-speak is sometimes so poetic and soulful, that it just gets me right in the gut, then I giggle and snort maniacally....Alan Greenspan just gets more precious every time he speaks in public. Frothy brings up images of beer, a bubble bath, an... [Read More]
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» Alan Greenspan Is a Master at What He Does from Brad DeLong's Website
Matthew Yglesias watches with a kind of awe: Matthew Yglesias: Department of Equivocation: "Being Chairman of the Federal Reserve is sort of like the reverse of being a blogger -- you need to be very, very, very careful about every word that passes thr... [Read More]
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Comments
Something like 2/3 of the new morgages in the san francisco bay area are interest only loans. It is gong to get ugly.
Posted by: joe o | May 23, 2005 6:17:44 PM
The DC housing market is most defintely bubblicious. Anyone who pays $275,000 for a one-bedroom condo is a complete fool! I live in Monkey County, MD and I can't find any decent condos or townhomes within a sane price range. SFH's under $300,000 are rare finds from Silver Spring up to Germantown.
Real estate on Gerogia Ave., NE is looking better day by day. It can be lonely for a white middle-class guy like me but I have the heroin pushers and hookers to keep me company.
Posted by: ekko | May 23, 2005 6:19:40 PM
"From the standpoint of self-interest, this seems to me to be the best possible outcome since a decline in local home prices would be give for me as a non-homeowner who plans on sticking around town for a whle"
Well, not necessarily. Because of the current homebuying insanity, there is simultaneous upwards pressure on housing prices and downwards pressure on rental rates. See How Housing Lowers CPI. So, really, a pop in the local housing bubble is only a win if you plan on buying a house in a small number of years. Otherwise you will see rents rise as more people move back into renting (or, more likely, the rate of renter->homeowner transitions drops and the rate of youth->renter transitions stays constant).
I think.
And ekko: $275 for a one-bedroom condo sounds okay these days in Seattle. But then again, there's a reason I'm not buying.
Posted by: Electoral Math | May 23, 2005 6:22:00 PM
http://www.svcn.com/archives/lgwt/20050518/lgperkins.shtml
The good news is that most experts say the market has just about peaked--for now--at the region's new record price level for single-family detached homes, $750,000--up a whopping $86,000 this year alone and $132,000 in the past year.
The median price for condos came in at $465,000 in April, up only $55,000 since the beginning of the year, and $80,000 from a year ago, according to the Bay Area Real Estate Market Newsletter by Richard Calhoun, broker owner of Creekside Realty in San Jose.
Posted by: PaulC | May 23, 2005 6:36:41 PM
I agree with Matthew. Bring on the bubble burst. Us first-time buyers need affordable housing!!
Posted by: drjimcooper | May 23, 2005 6:49:50 PM
I dunno about that, Electoral Math. Rental prices dropped in NYC when the last bubble popped. I think what happens is that a lot of properties that would have been sold get rented instead, because people are unwilling to take a loss on a sale.
Posted by: AlanC9 | May 23, 2005 7:05:56 PM
The other thing he said, which didn't really get any play here for some reason was that revaluaing the yuan won't do squat for our trade imbalance.
Which is true.
Posted by: mumon | May 23, 2005 7:05:59 PM
Oh, and look at the map linked to on my blog 'bout this.
All that froth just so happens to be only where people live, so what's the worry?
Posted by: mumon | May 23, 2005 7:07:01 PM
typically, when a "little bubble" of housing bursts, what happens is that people pull their homes off the market. There are, of course, always people who need to sell, but unless they just bought (say in the last 12 months), they are unlikely to be deeply harmed.
Now, people who are just buying with interest only ARMs, well, they are just begging for trouble....
Posted by: howard | May 23, 2005 7:58:15 PM
Is the bubble froth deep-cleaning or pleasantly scented?
I've heard enough directly contradictory intelligent-sounding comments on the housing price phenomenon to convince me that the whole discipline is a hair above astrology on the scientific rigor scale.
My understanding is basically this. . in the Seattle city limits, house prices have consistently increased 8-12% annually for many years. . at least as many as since we bought our house. It's probably been at least a decade. Now it's pretty obvious that incomes have not been rising at that rate. . in fact they've been going down vs inflation. So that means housing is climbing the income scale. The percentile of income that could buy a house in Seattle 10 years ago is well below the percentile that could buy one now. People in that percentile are now buying in the suburbs. Since income distribution is more or less a bell-curve tail at the high end, this means that the number of potential buyers is going down consistently. People are basically selling to buyers with higher incomes than they have. Low interest rates mitigate this process since people can buy as if they have higher incomes when the rates are low. But the rates obviously can't go down much from here, and since most people don't recycle their houses frequently the people induced to buy by low rates are off of the market and out of the potential buyer pool. So the question I have is, when that pool is finally tapped out (my guess is 1-2 years), what happens? Why wouldn't the market just taper off at some kind of inflection point and then grow even with inflation + incomes, occupied by people in the same income percentile for many years? Everyone assumes that there will be some kind of crash, where houses drop back down the income percentiles significantly. I can't argue against that, but I don't understand why it would happen.
Posted by: sidereal | May 23, 2005 8:18:04 PM
As one of those first time home buying DC yuppies (w/ a 5 yr interest only ARM no less!), so I'll side with sidereal's analysis (?). Here's to 10% annual increases in DC home values from here to infinity!
Posted by: fnook | May 23, 2005 8:43:38 PM
Are there any urban/surburban places in America where housing prices haven't skyrocketed in the last couple of years? Even in my small, affordable Columbia, SC, both new home prices and renting rates have risen, the latter by as much as $50-100 in trendier parts of town in the last year. I guess Greenspan means "a lot of little bubbles" in the same sense that the entire U.S. isn't incorporated into one giant city, but a lot of little towns and cities.
Posted by: Chris | May 23, 2005 8:46:52 PM
Silly harvaad boy, do you have any empirical evidence that the Fed chairman speaking clearly and plainly would be anything other than good for the citizen? If so, present it. Otherwise you're just a Greenspan cult taint licker, like so many other "deep thinking pundits."
Posted by: jerry | May 23, 2005 10:44:43 PM
booga booga!
Posted by: pope fed chairman | May 23, 2005 10:48:37 PM
Made you look, made you look, now you're in the baby book!
Posted by: pope fed chairman | May 23, 2005 10:50:15 PM
You want the truth? You can't handle the truth!
Posted by: pope fed chairman | May 23, 2005 10:52:46 PM
With a semester's worth of macroeconomics, and another course in finance on how to value a company, and various talking heads, his mystery speech is really pretty clear.
If I can figure it out, I assume that what he says is crystal clear to anyone in charge of any amount of money.
So the only people kept in the dark are the vast majority of citizens that haven't had a semester of macro and a semester of finance.
If knowledge is power, what is the value of keeping the citizens in the dark?
Asswipe.
Posted by: jerry | May 24, 2005 2:35:52 AM
Actually, it's not "mystery" speech. Greenspan hedges his comments because he's an analyst, not a cheerleader.
Now, i don't think he's always been such a sharp analyst (in short, i am not in the cult), but if the guy wants to present a very careful depiction of an aspect of the economy, that's his job!
Posted by: howard | May 24, 2005 10:28:56 AM
So the question I have is, when that pool is finally tapped out (my guess is 1-2 years), what happens? Why wouldn't the market just taper off at some kind of inflection point and then grow even with inflation + incomes, occupied by people in the same income percentile for many years?
This is a good theory if you don't have to live anywhere, never have to move, and never lose a job. Unfortunately, none of those things happen in the real world. In the real world, and especially the real world of the last few years, people have been buying more house than they can afford, lured in by silly schemes like interest only 10 year ARMs, betting the farm (literally) that the housing bubble will not burst. On top of that they then take out home equity loans on the (hopefully not illusory) increase in equity.
What happens if China decides to stop lending us money and interest rates jump to 10% (don't even contemplate the disaster of rates at the levels that they were in the Carter years)? Or the Saudis stab us in the back and decide to start selling oil in Euros instead of Dollars? Our economy is on such a knife edge anything can send it over the edge.
People will lose their jobs and will not be able to make their house payments. They won't be able to sell their houses for what they owe (which will be more than they bought them for and more than they are worth) and will find themselves "upside down" on their loans. Banks will be stuck with foreclosed houses that they can't sell. The PMI industry will be screwed and the ripples will move into Fannie Mae and Freddie Mac (which are already on shaky ground). Guess who will be left holding the bag? The taxpayers again.
No, the current situation is very unhealthy.
Posted by: Freder Frederson | May 24, 2005 10:50:40 AM
I think Matt's definition of "bubble" is a little off. Just because there's a bubble, doesn't mean it's going to burst suddently, the way the Nasdaq did in 2000. The economists I've read here in Southern California say there's definitely a bubble, no question about it. They're split on whether it's going to slowly deflate, or burst. If it deflates gradually, we'll probably see home prices stay flat for a few years. Hardly a disaster for homeowners.
Posted by: Steve | May 24, 2005 12:58:13 PM
If it deflates gradually, we'll probably see home prices stay flat for a few years. Hardly a disaster for homeowners.
Yeah, that would be more of a disaster for the non-homeowners who will have to wait until general inflation and wage increases come into line with home prices.
Posted by: PaulC | May 24, 2005 1:24:16 PM
If it deflates gradually, we'll probably see home prices stay flat for a few years. Hardly a disaster for homeowners.
Actually for all those people with interest only ARMs and those who have home equity loans based on bogus appraisals (or even those that are for up to 110% of appraised value) who find themselves in a position that they have to sell their houses, it will be a disaster. Even if you have a conventional loan but had a low down payment the costs associated with selling (especially the broker's fees) will quickly put you in the red.
It is not a pleasant thing when the seller has to write a check at closing. Believe me I know. The market was flat in DC between '93 and '97 and I had to sell a house (in Old Town Alexandria two blocks south of King Street no less) for the essentially the same price I bought it ('97 was a really bad year for me). We had very little equity in the house and after paying the Real Estate Agent's fees and a portion of the closing costs (as is standard practice in DC) we took a considerable loss. In fact we barely avoided foreclosure. I don't even want to think what that townhouse would sell for now, it just makes me sick.
Posted by: Freder Frederson | May 24, 2005 1:41:25 PM
Another DC resident here. There are several things about the DC market that are particularly disturbing right now:
Over 43% of mortgages last year were interest-only mortgages. This means that people are really reaching to get into houses. It also means that almost 1/2 of last year's buyers are (1) not building any equity -unless through housing price appreciation - in their homes for next 10 years and (2) looking at a 50% increase in their mortgage payments in 2014.
The speculative buying. Here in Columbia Heights all you hear about is how you should buy a home with no money down and triple your money in three years, just like your neighbor did. Your neighbor, meanwhile, is taking his newfound wisdom and housing equity and pooring it into an 'investment' property. Suddenly, real estate, which has historically had fairly low returns, is the latest get rich quick scheme, with disturbing statements like 'the old rules don't apply anymore' and 'it's a whole new ball game'.
The huge chasm between rent and mortgage payments. To buy an equilivent property to my $1100 Adams Morgan apartment rental, my mortgage payment + taxes + insurance + condo fee would be approximately $3000. You can't 'sit out' a price slump when you move (and Washington, particularly DC, is very mobile) if you can't rent your place out and even come close to meeting the mortgage payment. I foresee a lot of checks written out at closing, and quite a few defaulted loans.
The loose credit market. I've never heard of credit this fast and loose, with middle-class working young people getting approved for mortgages of $800,000 with no downpayment. I can go out today and get a mortgage that would put me at serious risk of bankrupcy if my household income took the smallest hit. What on earth are banks thinking?
As for me, I'm staying on the sidelines. With all the money I'm not putting into an interest-only mortgage, I've saved an extra $20,000 in my 401k this year, where it is at least better diversified than in the current DC real estate sweepstakes. It will be interesting to see how this all turns out.
Posted by: Matilde | May 24, 2005 2:13:04 PM
Any of you folks in the DC area are welcome to bid on my TH in Laurel. :)
"This is a good theory if you don't have to live anywhere, never have to move, and never lose a job. Unfortunately, none of those things happen in the real world. In the real world, and especially the real world of the last few years, people have been buying more house than they can afford, lured in by silly schemes like interest only 10 year ARMs, betting the farm (literally) that the housing bubble will not burst. On top of that they then take out home equity loans on the (hopefully not illusory) increase in equity."
Actually, it does happen in the real world. I know it's rare, but it does. You take a job with Uncle Sam, you save for years like you have nothing, and then take out a 30 year loan on an overpriced new house instead of gambling on it with an interest only or ARM like the rest of the fools in the DC area. Everything you described past the "losing your job" part is a choice.
Posted by: khead | May 24, 2005 3:11:44 PM
An object will sell for what it is worth.
Worth is determined by how many people bid for it.
Much like the NASDAQ at 5000, remember that?
When the buble breaks, your home will be worth 1/2 of what it is now, but the GOOD POINT IS THIS!
Just have your house value reassessed!
your taxes should drop in half thenways.
This is awful awful bad news for the cities which willl just HAVE to double your taxe rate!
Which will cause further selling and lowered values.
We are going into inflationary recession to some degree.
and everyo9ne who has their homes paid off will do fine.
YOU FORGET ONE THING!
LAST year if you had 1,000,000 dollars in the bank and made 8 percent interest off of it,
THIS YEAR you are worth 750,000 and making 9 percent interest.
AMerican dollar value lost more than 25 percent BUT YOU DONT KNOW IT YET!
SO YOU DONT FGFEEL POORER!
but you ARE poorer and you THINK you are getting richer.
One of our neighbors has 2.5 million in investments, I asked how she was doing (LAND DEVELOPMENT etc.)
She said they were making 12 percent or so last year.
I told her she actually lost 30 percent (18 percent after her "GAINS"
she was very thoughtful.
It is like the robber coming and taking your diamond brooches and leaving you twice as many fake brooches.
you think you are ahead till you try to sell them.
The economy is sour and we don't know it yet.
Posted by: blownvalue | May 26, 2005 3:39:55 PM
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