WASHINGTON, Oct. 19 - Alan Greenspan on Tuesday defended one of
the most tangible results of his tenure as chairman of the Federal Reserve
Board: the big increase in homeowner debt.
In his most detailed discussion yet on the subject, Mr. Greenspan disputed
analysts who worry that home buyers have become swept up in a speculative
housing bubble that the Fed is partly responsible for creating. While he
acknowledged that consumer debt has risen "especially steeply" in the last
five years, he said family finances were still in "reasonably good shape."
Mortgage debt and housing prices have both soared since 2001, in part because
the Federal Reserve pushed borrowing costs to their lowest levels since the
1950's. With interest rates now rising, a growing number of economists worry
that many home buyers will face higher monthly debt payments in an economic
environment that could cause house prices to fall.
In a speech here to a convention of community bankers, Mr. Greenspan said
fears of a speculative bubble in housing prices were exaggerated, because
people cannot buy and sell their own homes as easily as stock market
speculators can buy and sell stock.
The biggest risk of a housing bubble, he said, would be among people who
buy second homes and vacation homes. But those kinds of purchases accounted
for only 11 percent of new mortgages in 2003.
The Fed chairman also contended that many measures of household debt overstate
the size of debt burdens. While home mortgages have soared, the values of the
properties have climbed as well, he said.
"Taking into account this higher level of assets," Mr. Greenspan said, "all
in all the household sector seems to be in reasonably good financial shape
with only modest evidence of an increased level of household financial strain."
But a growing number of private economists are skeptical, arguing that the
Fed has contributed to an overvalued housing market.
Goldman Sachs, in a report entitled "Trouble Brews in the Housing Market,"
estimated last week that nationwide housing prices are now about 10 percent
higher than the level justified by current interest rates and household incomes.
The report also warned that the supply of new housing is growing much more
rapidly than demand in many areas. Home buyers, meanwhile, "appear to have
developed a speculative mind-set" with wildly inflated expectations about
future price increases.
Kathleen Bostjancic, a senior economist at Merrill Lynch in New York,
said Mr. Greenspan was glossing over the risks of a housing bubble,
particularly one focused in high-price areas on the East and West Coasts,
similar to the stock market bubble that collapsed four years ago.
"He talks about how housing doesn't lend itself to being a bubble because
it's harder to trade houses and you have to live in a home," Ms. Bostjancic
said. "But on the other hand, it's happening in the U.K. and it has happened
in Japan. It also happened here in the Northeastern United States in the
early 90's. There is a precedent for housing bubbles in the U.S. on a regional
basis."
Ms. Bostjancic also noted that about 20 percent of consumer debt is
adjustable-rate financing, and about 40 percent of new home mortgages have
adjustable rates. Even though many adjustable loans have limits on rate
increases and often lock in fixed rates for several years initially, monthly
payments on such loans will eventually go up as interest rates climb higher.
And home buyers right now face higher interest rates immediately, crimping
demand.
Mr. Greenspan said that consumers do not appear overwhelmed by their debt
loads and that many homeowners had used home-equity loans to pay down more
expensive kinds of consumer debt, particularly credit card balances. The
so-called financial obligations ratio, a broad measure of the mandatory
monthly household payments, has climbed sharply since the early 1990's and
peaked at 18.5 percent of disposable income in 2002. Since then, the ratio
has declined slightly to 18 percent. But Mr. Greenspan acknowledged that
homeowners and renters alike are using more of their income than before to
cover credit card debt.
Dean Baker, director of the Center for Economic Policy Research, a
liberal research group in Washington, has long argued that a housing bubble
is under way and that household finances are shakier than they appear.
Mr. Baker said that homeowners' equity is a significantly smaller percentage
of the value of their homes than it was in the 1970's, even though the
population has become older and should have accumulated greater assets and
built up a higher net worth.
According to Federal Reserve data, homeowners' equity was equal to 66 percent
of the value of their real estate during the 1970's. That share declined to
an average of 56.8 percent in the 1990's and is now about 55 percent.
"You'd expect people going into their mid-50's would be paying off their
debt," Mr. Baker said. "Instead, the percentage of equity is at record lows."
