Fed chief says housing boom near the end

August 30, 2005

Greenspan: Real estate bubble losing air

Inman News

The nation's frenzied housing boom and the consumer spending it has spurred are near an end, Federal Reserve Chair Alan Greenspan said Saturday, according to media reports.

Speaking at a Fed symposium in Jackson Hole, Wyo., on Saturday, Greenspan said both the excesses of the housing market and the nation's unprecedented dependence on foreign borrowing were likely to correct themselves through the normal function of market forces, the New York Times reported.

Greenspan, who is soon stepping down as chairman of the Federal Reserve, was reflecting about his long tenure in the position. His reflections were mostly positive, according to the Times.

He also acknowledged more strongly than before that the housing boom, which has been fueled in large part by the Fed's own decision to prop up the economy with low interest rates, is closely tied to the nation's soaring trade deficit and its record level of foreign indebtedness, reports said.

Greenspan also seemed intent on defending his legacy against critics who say his policies contributed to U.S. imbalances, which could lead to higher interest rates and potentially wrenching declines in housing prices and consumer spending, according to reports.

In Greenspan's view, the housing market will inevitably "simmer down," and sales and prices are all but certain to slow, reports said. "House turnover will decline from currently historic levels, while home-price increases will slow and prices could even decrease," he said, according to the Times.

Greenspan's prediction that prices could decline dovetailed with other recent warnings that people have become too confident that the market value of assets – whether in real estate or in stocks and bonds – will remain high for the foreseeable future.

But the Fed chairman went further, saying that the end of the housing boom will also help correct other major imbalances, reports said. It will lead to weaker consumer spending, a recovery from today's nearly nonexistent rate of household savings and a reduction in the nation's huge trade deficit, Greenspan reportedly said.

Greenspan was gloomier about the nation's long-term budget deficits, the Times reported. He said today's budget deficits were likely to get much worse as the nation's Baby Boomers begin to retire and drive up the costs of Medicare, Social Security and other entitlement programs, according to reports.

Copyright 2005 Inman News

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