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Wednesday, 13 May 2009

Greenspan Sees ‘Seeds of a Bottoming’ in U.S. Housing

By Vivien Lou Chen and Dawn Kopecki

May 12 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.

“We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington. The U.S. is “at the edge of a major liquidation” in the stock of unsold properties, which may help to stabilize prices, Greenspan said.

Home-sales figures in recent weeks have shown a slower pace of decline, and the slide in property prices has eased, according to gauges including the S&P/Case-Shiller index.

The former Fed chief, who was among the first prominent economists to warn about the risk of a recession in 2007, said housing prices could fall another 5 percent without putting too much strain on the economy.

“We run into trouble if it’s very significantly more than that,” Greenspan said. Housing prices remain “the critical Achilles’ heel” of the economy.

While the housing bottom may not be obvious in prices, it is becoming clear in “significant regional differences,” where some of the hardest-hit areas are starting to show signs of improvement, he said.

Greenspan said in congressional testimony in October that “a flaw” in his free-market ideology contributed to the “once-in-a-century” credit crisis.

Less Trouble

Today, Greenspan said companies are having less trouble raising money. U.S. firms have sold bonds at a record pace so far this year, including a $3.75 billion offering today from Microsoft Corp., the world’s largest software maker.

Wells Fargo & Co. and Morgan Stanley raised $16.6 billion in stock and bond sales on May 8, just a day after the government ordered them to raise capital, becoming the first banks to respond to the government’s mandate.

“Company after company has been raising capital and they are getting far more than they expected,” said Greenspan, 83, who left the Fed in January 2006 after almost two decades at the helm and has returned to his former role as a private economic forecaster.

With the expansion in market liquidity, “you begin to see, as we are seeing today, a very significant rise in the availability of money,” Greenspan said. As markets improve, “it’s very easy to see that it’s going to continue for an indefinite period,” he said.

Prices Fell

U.S. home prices fell the most on record during the first quarter from the prior year as banks sold seized homes and foreclosures persisted at a high rate in California and Florida. The median U.S. housing price fell 14 percent during the quarter to $169,000 year-over-year, the National Association of Realtors said earlier today.

U.S. banks held $26.6 billion of repossessed real estate at the end of 2008, more than doubling from a year earlier, according to the Federal Deposit Insurance Corp. in Washington.

Greenspan’s decisions as a central banker have come under scrutiny in recent years after the fall in home prices triggered a collapse in mortgage financing and other credit.

Under Greenspan’s leadership, the Fed left the overnight lending rate between banks at 1 percent from June 2003 until June 2004. Regional Fed presidents such as Gary Stern of Minneapolis and Janet Yellen of San Francisco have publicly questioned the Fed’s hands-off approach toward asset bubbles like the one that emerged in house prices during Greenspan’s tenure.

Kept Rates Low

Former Fed Vice Chairman Alan Blinder, Stanford University professor John Taylor and other economists say Greenspan’s approach of keeping rates low for an extended period helped to foster the housing bubble.

“I’ve always argued going back many decades that you do not capitalize a piece of real estate with overnight interest rates,” the former chairman said today in response to an audience question.

The housing market is instead fueled by a decline in long- term interest rates, which started a full year before the Fed began cutting the federal funds rate, Greenspan said.

“I think there is a recalibration of financial history that I find very puzzling,” he said.

Referring to his critics, he said, “I can say that I respectfully disagree. They’re wrong.”

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