US heading for house price crash, Greenspan tells buyers
By Graham Searjeant, Financial Editor
WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.
He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.
In a pre-retirement speech to fellow central bankers at Jackson Hole, Wyoming, Mr Greenspan said that people were investing in houses as if they were a one-way bet, not allowing for the risk of price falls. He said “history had not dealt kindly” with investors who kept ignoring risks.
The Federal Reserve Chairman’s warning, his strongest yet, sent share prices falling on Wall Street, at one point knocking 66 points off the Dow Jones industrial average. By the close the Dow had recovered to 10,397.30, down 53.30 points.
Traders said that Mr Greenspan’s comments were reminiscent of his 1996 inveighing against “irrational exuberance” on the stock market, for fear that a crash there would hit consumers and push the economy into recession. When the share price bubble finally burst, Mr Greenspan cut Federal interest rates to 1 per cent, triggering the flood of cheap loans for housing. He fears that rate increases set in train as the economy recovered could throw the housing market into reverse and suggested that the twin deficits would now restrict his room to manoeuvre if a house price downturn hit spending. Asset prices were, he complained, driving monetary policy more than ever before.
Share traders were also worried by an unexpectedly sharp fall in the University of Michigan consumer confidence index, a small but influential barometer, which fell for the first time in three months. The expectations index slid from 88.5 to 76.9.
Rob Carnell, of ING Bank in London, said that Mr Greenspan’s warning was an eerie reminder of a successful campaign last summer by Mervyn King, Governor of the Bank of England, to “use rhetoric rather than interest rates” to cool an overheating homes market. Britain has avoided a crash thus far.
On traditional tests, about a third of US local homes markets are now markedly overpriced. Over the past five years, the average US house price has risen by 50 per cent, half the rate of increase in UK prices in the five years to summer 2004. However, prices have risen more sharply in favoured areas, such as New York, and more than doubled in a few cities, such as San Diego.
They really needed Alan Greenspan to tell them that with the current price of housing(especially here in cali)
and the current wages being paid to the average worker
people are not going to be able to afford to buy a house
two bedroom house here new is going for $300,000
If you can getan employeer that pays $15.00 per hour you are lucky
on $300,000 your payment will be around $1800.00 a month
I dont need alan greenspan to tell me that there are not enough hours in a month to make a house pmt like that .
BTW at our company they are paying installers $10.66 an hour
the biggest risk is for first time buyers and speculators alike who use the interest only or some adjustable rate mortgages as their financial avenue. if there were to be a downturn and rates are significantly higher the house would not be worth what is owed on the mortgage and these types of mortgages need to be converted, there could be a big foreclosure rate. this would hurt everyones values, but those of us who own large shares of our proerties would be much less effected.
When interest rates are low the housing market goes up as well as the value because of demand. Greenspan is worried that he won't get interest rates up before he retires. How many times has he raised the rate in hopes of increasing the long term rates for homes? It has not worked and he doesn't know what to do other than try and scare people other ways. Someday it will happen and what you bought may be worth half of what you paid or less.
Seriously, here in the burbs of Atlanta they are building houses like there will be no tomorrow. Saw one beautiful house on a small tract bulldozed so the developer could have more lots. This is becoming common in metro. And these are nice houses less than 15 years old.
CT2,That house was in the willowglen area of san jose,i`ts the preppy area where people buy there for status,you know "i`m doing one up on the jones". I have no idea where people get the money to buy these over priced homes.We were running a 8% unemployment rate for awhile.They tear down the house but leave i existing wall up to qualify it as a remodel & get to go through express plan check.They put a 2 story house on it & sell for 1.5 million.I`m doing a remodel/addition in saratoga that the fondation work alone is $350,000.00. The general contractors contract is 1.7 million.The owners are in their 30`s.My neighbor just sold his house for $840,000.00. 2 days on the market & i`m in the concrete getto of san jose.