September 26, 2005

HE CAN'T RETIRE FAST ENOUGH:

Greenspan: Homeowners could weather price drop (Jeannine Aversa, 9/26/05, AP)

Federal Reserve Chairman Alan Greenspan, softening his concern about a possibly overheated housing market, said Monday that many homeowners have enough equity to cushion the shock if prices drop. [...]

"The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," he said. Less than 5% of home borrowers were highly leveraged, according to one measure, he cited.

An end to the housing boom, meanwhile, could have a silver lining, the Fed chairman added.

Greenspan hypothesized that it probably would be accompanied by a moderation in the growth of consumer spending. That could lead to a boost in Americans' personal savings rate, which has been dismally low, and could curb Americans' insatiable appetites for foreign-made goods, helping to narrow the United States' bloated trade deficit, he said.


Sure, we could be like the Japanese and instead of having equity in homes we could have passbook savings accounts.

Posted by Orrin Judd at September 26, 2005 4:55 PM
Comments

"Less than 5% of home borrowers were highly leveraged, according to one measure, he cited."

This statement is difficult to believe based on the number of interest only-loans written and anecdotal evidence from my wife, who does a lot of residential real estate work in Chicago.

Posted by: Rick T. at September 26, 2005 5:11 PM

Rick T: And real estate agents in red states (and non-urban blue areas) probably wonder what the fuss about this "housing bubble" is all about...

Posted by: b at September 26, 2005 5:15 PM

Anecdotes are always wrong.

Posted by: oj at September 26, 2005 5:17 PM

Imagine after such a long and distinguished career, Greenspan would disgrace himself by trying to throw a monkey wrench into a burgeoning economy. I wonder if he's senile and being manipulated by some leftover Clintonistas.

Posted by: erp at September 26, 2005 5:42 PM

This is the third time he's lifted rated into a deflation, causing the last two slowdowns.

Posted by: oj at September 26, 2005 5:45 PM

There's no connection between whether a loan is interest-only and whether a homeowner is highly leveraged.

Posted by: David Cohen at September 26, 2005 5:53 PM

Americans' net worth is now just a hair below $50 TRILLION. We are off the map here folks.

Posted by: Luciferous at September 26, 2005 6:00 PM

It's over $50T by now, or more than four times GDP.

Posted by: oj at September 26, 2005 6:07 PM

OJ:

I understand the plural of anecdote is not evidence.

http://www.ncpa.org/pub/ba/ba526/

According to the Federal Reserve, home equity the portion of a home's value not covered by a mortgage or equity loan has fallen from 75 percent of home values a generation ago to 56.3 percent today.
In the first half of 2005, two-thirds of homebuyers financed more than 80 percent of their purchase, and 38.1 percent borrowed more than 95 percent, according to SMR Research. Historically, loans with less than 20 percent equity have been considered risky.
According to the Federal Home Loan Mortgage Corporation ("Freddie Mac"), in the last four years homeowners have taken $559 billion in equity out of their homes by refinancing.
Additionally, many homebuyers are making larger mortgage payments than their incomes will support, according to financial experts:

According to the Federal National Mortgage Association (" Fannie Mae"), 28 percent is the most one ought to pay.
Almost 40 percent of California homeowners compared to 29 percent nationally pay at least 30 percent of their income for housing, according to the Public Policy Institute of California.
In California, 15.4 percent of homeowners pay as much as 50 percent of their income for housing, including mortgage, taxes, insurance and utilities; this includes 20 percent of recent homebuyers nearly twice the proportion of homebuyers nationally (10.6 percent).
Furthermore, homeowners are increasingly buying and refinancing with unconventional loans, such as adjustable rate, negative amortization and interest-only mortgages, rather than traditional fixed mortgages. Such loans have lower initial payments, but rise automatically with interest rates. The Federal Reserve says that 47 percent of all residential mortgages by dollar volume are now nontraditional.

Posted by: Rick T. at September 26, 2005 6:49 PM
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