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Greenspan: Housing to Bottom in H1 2009

Thursday, 14 Aug 2008 12:44 PM

Former Federal Reserve Chairman Alan Greenspan foresees a bottom for the housing market in the early months of next year.

"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," Greenspan told The Wall Street Journal.

With his typical equivocation, the former Fed chairman added that although a bottom may be hit, "prices could continue to drift lower through 2009 and beyond."

Always a big picture analyst, Greenspan's forecast is based on the reams of data he studies from a variety of sources, including reports and numbers from government and private enterprise.

These include the latest facts and figures on population growth, immigration trends, foreclosures, and housing starts, all of which Greenspan has recently seen as modestly optimistic.

As housing prices end their slide and start to stabilize, conditions will also be ripe to "end the current global financial crisis," Greenspan said.

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities," according to the former Fed chairman.

"We won't really know the market value of the asset side of the banking system's balance sheet and hence banks' capital, until then."

Greenspan has been the target of much criticism lately for a mostly hands-off regulatory policy and for keeping a lid on interest rates. The chairman's critics claim that many of the country's current financial problems are attributable to these policies.

In his own defense, Greenspan cites other elements that caused our current crisis, among them the rise in housing prices and world market downward pressure on interest rates, a confluence of circumstances in an era he called "a historically unusual period."

"Even sophisticated investors misjudged the risks they were taking," Greenspan said.

Economic conditions are much different now, and Greenspan's forecast for the end of housing's implosion takes all the new data into account.

His principal calculations, however, are based on two critical elements:

Excess supply of newly built homes, and existing single family homes owned by investors and lenders, the total of which now stands at about 800,000.

With that figure in mind, Greenspan uses the S&P/Case-Schiller National Home Price Index to compare the current price of houses, both urban and rural, against the government's estimate of the cost of renting a single family home.

He then calculates when it's better financially to own a house, or sell it, invest the proceeds in something else with a bigger return, and rent an identical house in the same neighborhood.

"It's the imbalance of supply and demand which causes prices to go down," Greenspan said.

"But it's ultimately the valuation process of the use of the commodity ... which tells you where the bottom is."

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Former Federal Reserve Chairman Alan Greenspan foresees a bottom for the housing market in the early months of next year."Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," Greenspan told The Wall Street...
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Thursday, 14 Aug 2008 12:44 PM
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