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October 19, 2004
Greenspan Tries to Soothe Housing Worries
Business - Reuters
WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Alan Greenspan
said on Tuesday that he did not foresee big price distortions developing in home
prices and said Americans were handling their debts well.
Speaking to America's Community Bankers, Greenspan conceded there were concerns
about "the exceptional run-up in home prices" but said hefty debt burdens seemed
to be under control, provided that incomes and home prices did not tumble.
"A significant decline in consumer incomes or house prices could quickly alter
the outlook," Greenspan said, adding: "Nonetheless, both scenarios appear
unlikely in the quarters ahead."
The very size of the U.S. housing market shielded it from widespread price bubbles,
he suggested.
"While local economies may experience significant speculative price imbalances, a
national severe price distortion seems most unlikely in the United States, given
its size and diversity," Greenspan said.
Analysts said the Fed chief seemed to trying to soothe concerns about potential
economic imbalances.
"Greenspan's trying to soften fears of a housing bubble just as he has tried to
soften fears of higher energy prices or the growing current account deficit,"
said Josh Stiles, a bond strategist with IDEAGlobal in New York.
"There just doesn't seem to be that much that worries him," Stiles added.
LOW RATES A SHIELD
Greenspan acknowledged there were "pockets of distress" among U.S. households,
indicated by "persistently high" bankruptcy rates, but on balance Americans'
finances "appear to be in reasonably good shape."
He said some of the increase in the ratio of household debts to incomes in
recent years was not necessarily a sign of distress, since part of it resulted
from more renters buying homes and gaining equity.
While average annual mortgage debt has grown at rates exceeding 12 percent for
the past two years, "the financial obligations of homeowners have exhibited
little change as a share of their income because mortgage rates have remained
at historically low levels," Greenspan said.
Susan Stearns, vice-president of institutional foreign exchange sales
for Bank of Montreal in New York, said Greenspan appeared to be allaying fears
of a potential housing bubble. Policymakers in other countries, particularly
Britain, have worried about the risk of a destabilizing bubble in home prices
in recent years.
"He (Greenspan) thinks that the housing data that he has seen is reasonable
given the scenario here. It projects a note of calm in a market that is poised
for concern," Stearns said.
Greenspan said he did not think U.S. consumers were likely to come under stress
even if interest rates were to keep rising. The Fed has raised U.S. official
short-term interest rates three times this year, though longer-term rates such
as those on mortgages remain low by historical standards.
"Altogether, even in a rising interest-rate environment, debt-service ratios at
least for a while should rise only modestly," said Greenspan, who did not take
any questions from the audience.
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