ASHINGTON, 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."
