Mortgage market to 'Simmer down'

March 5, 2003

Greenspan says trends could hurt economy

By Marcie Geffner
Inman News Freatures

Federal Reserve Chairman Alan Greenspan expects the "frenetic pace" of the mortgage market to "appreciably simmer down" this year and he said that could dampen consumer spending and weaken the national economy.

Read Chairman Greenspan's Speech [pdf]

It is "difficult to imagine" last year's pace of housing-related borrowing being maintained, the Fed chief said in a speech he delivered yesterday at the Independent Community Bankers of America convention in Orlando, Fla.

Homeowners refinanced nearly 10 million mortgages (not including home equity or construction loans) last year, when mortgage interest rates hit 30-year lows and home prices increased. The dollar volume of those refinances was an all-time record $1.75 trillion, or one-third of the total volume of loans outstanding at the beginning of the year, according to Federal Reserve estimates.

Homeowners cashed out nearly $200 billion, or almost 3 percent, of accumulated home equity at the beginning of the year and spent billions of dollars to repay home-equity loans and reduce credit-card debt. That spending has been a crucial prop beneath the nation's struggling economy.

Homeowners also propped up the economy by selling their home, using part of the proceeds to purchase a replacement home and spending the rest on home improvements and consumer goods. A record 6.4 million houses and condominiums were sold last year at record prices, giving homeowners an unprecedented opportunity to extract equity for other expenditures.

Homeowners took out $700 billion, or more than 10 percent, of home equity last year, but they still had more equity at the end of the year than they had at the beginning of the year due to a 7 percent increase in existing home prices and $300 billion in new home construction, net of mortgages on those homes, according to the Federal Reserve.

But the volume of refinancing loan applications already has softened, and the narrower spread between the interest rate on new or recently refinanced existing mortgages and the current interest rate on yet another new mortgage also should curtail further equity-out refinancing, Greenspan said.

The pace of home price appreciation already has "clearly slowed," although there is no housing "bubble," the Fed chief said.

"It is, of course, possible for home prices to fall....But any analogy to stock market pricing behavior and bubbles is a rather large stretch" because selling a home involves "substantial transaction costs" that "greatly discourage the type of buying and selling frenzy that often characterizes bubbles in financial markets," he said.

"Any bubbles that might emerge would tend to be local, not national, in scope," he added.

A slower pace of home price appreciation or even "modestly declining home prices" would curtail the rate of refinancing because homeowners would have smaller capital gains to tap, Greenspan indicated. That again would cut into the consumption spending that's supporting broader economic activity.

But slower home price appreciation wouldn't be as harmful to housing, consumer spending and the economy as the snowballing impact of higher interest rates would be.

"Should rates rise, it is entirely possible that new and existing home sales would decline, leading to a lower level of realized capital gains on homes, a further narrowed refinance spread and, as a consequence, less overall home equity extraction," Greenspan concluded.

Copyright: Inman News Service

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