Friday, February 16, 2007

Worst of U.S. Housing Slowdown Is Over

Former Federal Reserve chairman Alan Greenspan said the U.S. housing slowdown may be coming to an end, citing sales of new homes.

"I think the worst is behind us," Greenspan, 80, told a Toronto conference, during a speech broadcast live via satellite. "We are in the midst of a very significant inventory liquidation of unsold new homes."

Greenspan's comments represent a view similar to those of his successor, Ben S. Bernanke. Bernanke told the Senate Banking Committee today that the Fed expects economic growth to strengthen "somewhat as the drag from housing diminishes." Fed policy makers predicted gross domestic product will increase by 2.5 % to 3 % this year.

In the statement after the Federal Open Market Committee's most recent meeting on Jan. 31, the Fed said recent data suggest "somewhat firmer economic growth," while the housing market is showing "some tentative signs of stabilization."

Such stabilization is coming after the market's worst slump in 15 years. Sales of previously owned homes are near a three-year low, while housing starts rebounded in November and December from the slowest pace since 2000.

"The worst of the adjustment is over, meaning not that the market is turning," Greenspan said, "but that the rate of decline was at its maximum in the third quarter and continued over in the fourth quarter and should now be moving to a much less negative direction."

Unsold Homes

Inventories of unsold homes are shrinking by about 10,000 to 15,000 units a month, and will soon start to shrink by about 20,000 to 30,000 units a month as housing starts drop, Greenspan said.

"That inventory will continue to liquidate and markets will turn around," he said.

Greenspan also said "disarray" in the U.S. subprime mortgage market, which serves borrowers with weak credit who typically pay higher interest rates, isn't likely to create greater financial instability in the rest of the economy.

"We do have a problem here, it's probably not over," Greenspan said. "It may actually infect some parts of the prime mortgage market, but there's no real evidence that this is a significant issue."

Bernanke said today during his semiannual appearance before the Senate panel that "distress" in the subprime market is of "significant concern" to him, though he didn't yet think it had implications for the larger economy.

"Predatory Lending"

The comments illustrate concern about the subprime market as rising interest rates, looser lending standards and falling home prices put more borrowers at risk of losing their homes. Senate Banking Committee Chairman Christopher Dodd told Bernanke today he's concerned "about the predatory lending practices that go on" in the subprime market.

The mortgage industry has been in turmoil in recent weeks as more homeowners fall behind in their mortgage payments. Subprime mortgages made up about a fifth of all new mortgages in the first half of 2006, according to the Washington-based Mortgage Bankers Association. As of the third quarter, they represented 13.6 % of outstanding home loans, up from 2.4 % in 1998.

Since Greenspan retired from the Fed in January 2006, he's been giving paid talks to audiences around the world and is writing a book, "The Age of Turbulence," to be published later this year. He was appointed Fed chairman in 1987 by then- president Ronald Reagan.


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