Mr. Greenspan’s legacy may be a bit tarnished these days but his views on housing seem spot on to me. The Wall Street Journal reports today that he’s feeling glum.
The U.S. economy won’t regain its strength until the price of houses stops falling. And that day hasn’t yet arrived.
“The crisis cannot end fully until home prices in the U.S. are at least stabilizing,” says Alan Greenspan, who continues to dissect housing data with as much interest as he did when he was Federal Reserve chairman.For the two-thirds of American families who own their homes, a house is their biggest asset. The lower house prices go, the less wealthy they are and the less they can or will spend and borrow. For home builders, the lower home prices go, the fewer new homes they will build and the fewer workers they will hire. And for many American banks and other financial institutions, mortgages, mortgage-backed securities and financial instruments that rest on mortgages remain a huge headache. The lower house prices go, the less these loans and investments are worth and the weaker the foundations of the financial system are.
Although sales of houses seem to be perking up, a good sign, home prices aren’t. The National Association of Realtors said this week that the median sale price of an existing single-family home in May — $172,900 — was 16.1% lower than a year ago. Prices of newly built homes in May were off 3.4% from a year earlier, the government estimated Wednesday.More sophisticated, though not as timely, measures that compare prices of the same houses when they are resold show similar trends. The S&P/Case-Shiller indexes for 10 and 20 big metro markets are still falling. The latest readings show a nearly 19% decline between March 2008 and March 2009. The Federal Housing Finance Agency, which tracks only home sales with mortgages sold or backed by Fannie Mae or Freddie Mac, said prices in April were down 6.8% year over year.
The consequences of a further steep decline in house prices on the overall economy are severe because it would cut so significantly into the American middle class, the vast army of consumers, the ones with conventional Fannie- and Freddie-backed mortgages, dubbed “conforming” in the trade. Any equity that subprime-mortgage borrowers had in their homes is gone. But about eight million conventional mortgages were made for home buyers in 2005 and 2006. House prices have fallen significantly since then.
“The bulk of conforming mortgages made since 2005 are close to being underwater,” says Mr. Greenspan, meaning their mortgages are greater than the market price of their homes. Wow. Although many underwater homeowners will keep making monthly mortgage payments, they can’t refinance or take out home-equity loans — and are at greater risk of default and foreclosure.
“We can take another 5% decline in house prices without much macroeconomic impact,” Mr. Greenspan says. But if prices fall by 12%, more than four million additional homeowners will be underwater.
Last August, Mr. Greenspan was predicting that home prices would “likely start to stabilize or touch bottom sometime in the first half of 2009.” He now says that day will arrive about three to six months later than he anticipated. Fewer new households were formed than he anticipated, which meant less demand for housing. And new homes were completed faster than he anticipated, increasing the supply. As a result, the supply of vacant single-family homes for sale didn’t fall as rapidly as he expected. Until this measure — which he regards as the best summary of the glut of unsold houses on the market — comes down significantly, home prices will keep falling.
Lawrence Meyer, the seasoned economic forecaster and former Fed governor, says one of the most important differences between “people who are bearish on the economic outlook and those who are less bearish” is their prediction about home prices. Mr. Meyer is in the less-bearish camp. He sees a slowdown in the pace of home-price declines and expects the U.S. economy to be growing at better than a 2% pace by the fourth quarter, faster than many other forecasters.
Three things could prove Mr. Meyer and the like-minded wrong about their encouraging outlook: a sustained increase in the thriftiness of U.S. consumers, which would depress overall growth; a relapse of financial turbulence, which would do the same; and persistently steep declines in the price of houses.