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Housing Boom Is An Imbalance: Greenspan

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Housing boom is an imbalance: Greenspan

By Greg Robb, MarketWatch

Last Update: 12:30 PM ET Aug. 26, 2005

JACKSON HOLE, Wyo. (MarketWatch) -- In his sharpest warning to date about rising home prices, Federal Reserve Chairman Alan Greenspan said the housing boom is an economic imbalance that could end badly.

In his final appearance at the high-profile policy conference at the Jackson Hole resort, Greenspan said high home prices are partly due to the low risk premiums demanded by investors, which have kept interest rates low.

Such increases in asset values "are too often viewed by market participants as structural and permanent," he said, adding that lenders could quickly turn cautious and the "newly abundant liquidity" could "readily disappear."

"History has not dealt kindly with the aftermath of protracted periods of low risk premiums," Greenspan said.

"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices," Greenspan said.

Greenspan is saying, "Watch out!" explained Sherry Cooper, chief economist for BMO Nesbitt Burns. "Think again and reduce risk in the management of your money, business, career, and balance sheets."

National housing prices have risen 12.5% in the past year through the first quarter, government data show. Second-quarter price data will be released next week.

In recent months, Greenspan has increased the level of his rhetoric about the housing market. In May, he said he saw signs of "frothy" housing markets in some regions. He has been consistent in his judgment that there is no national housing bubble.

In July, Greenspan said he believed exotic new mortgage products, such as interest-only loans and hybrid adjustable-rate loans, were of "particular concern" because homebuyers could find themselves unable to make mortgage payments if interest rates rise.

Greenspan also warned in July that investors had become too complacent about the risks of higher interest rates, a precursor to Friday's warnings.

Greenspan has said, however, that the Fed's 10 interest rate hikes in the past 14 months were not designed specifically to cool the housing market or to keep housing prices from rising.

On Friday, Greenspan said the flexibility of the economy is the most important policy asset in handling any shocks from a fall in asset values.

He expressed optimism that the adjustments could be made gently and a recession could be avoided.

"If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current- account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment," Greenspan said.

Protectionism and the large U.S. fiscal deficit threaten that flexibility, he said.

The Fed chairman, who is scheduled to leave office by the end of January, said central-bank forecasts and monetary policy are becoming increasingly driven by changes in asset prices, such as equities, bonds and real estate.

Greg Robb is a senior reporter for MarketWatch in Washington.

Edited by Catch22

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God - am I alone in remembering Greenspan's irrational exuberance comments during the formation of the dot.com bubble. I thought when he made that comment we were in for a crash. Instead the bubble grew and grew..

Pray this doesn't happen with US house prices.

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God - am I alone in remembering Greenspan's irrational exuberance comments during the formation  of the dot.com bubble. I thought when he made that comment we were in for a crash. Instead the bubble grew and grew..

Pray this doesn't happen with US house prices.

The greater the imbalance in the market the greater the correction......which market ? any bloody market you care to analyze :D

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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