FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN recently characterized the current housing boom as one of America's “economic imbalances,” putting it in the same league as the nation's current huge account deficit—the measure of the amount of foreign capital needed to keep even argued that “an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports, and a corresponding improvement in the current account deficit.” That judgment, in essence, puts the housing boom at the top of Greenspan's list of economic imbalances!
THE CONNECTIONS The chairman believes firmly in the connections between the housing boom and both the historically low personal saving rate and the historically high current account deficit. He noted that rapid house price increases, coupled with rapid turnover of the housing stock (i.e., record existing-home sales), have been generating a huge amount of home equity “extraction” as mortgages placed on homes purchased generally exceed mortgages extinguished on homes sold.
In addition, large amounts of equity accumulated through ongoing capital gains have been extracted by homeowners via cash-out refinancings and home equity loans. Greenspan stressed that the housing equity extracted through these various channels—about $600 billion last year—has been fueling consumer spending, driving the personal saving rate down and raising the amount of U.S. imports. The import surge, in turn, has driven up the U.S. trade and current account deficits.
WHAT CAN THE FED DO? The Fed definitely wants to take strength out of the housing boom, and Greenspan obviously is frustrated by the lack of success to date. The central bank will continue to hike short-term rates, hoping that long-term rates will firm up in the process. The Fed also will continue to speak out on the subject, hoping to weaken home buyer/investor expectations about future house price appreciation. Also, the Fed will continue to draw public attention to “exotic” forms of ARMs that the chairman has said are of “particular concern.” In this regard, the Fed may soon participate in an interagency supervisory letter stressing the risks such loans pose to both lenders and consumers.
One thing the Fed can't do is impose selective credit controls on home mortgages, such as maximum loan-to-value ratios or maximum maturities. Congress gave the Fed the authority to impose such controls back in the 1950s, but this authority expired long ago, and neither the Fed nor Congress wants to go down that road again.
SIMMERING DOWN Greenspan has expressed the hope and the expectation that “the housing boom will inevitably simmer down,” saying that the process will most likely involve a decline in turnover, a slowdown in price appreciation, and perhaps even a broad-based decline in prices. The NAHB's forecast is generally consistent with this vision, though we place a very low probability on a decline in national average home prices. In our view, this could occur only if the economy faltered badly or if many homes were dumped onto the market by investors/speculators. We have a lot of confidence in the economy, but, admittedly, some concern about the dimensions of the investor/speculator phenomenon.
Chief Economist, NAHB Washington, D.C.