Tuesday, January 11, 2005

Greenspan Dismisses Fears of Mortgage Bubble

Rising home prices combined with the low interest rates of the past five years have led to current speculation of a national housing bubble, causing some homeowners, lenders, and brokers to worry that the nation’s increasing home values will eventually begin to level and decline. In a speech at the America’s Community Bankers annual convention, Federal Reserve Board chairman Alan Greenspan dismissed the notion, stating that, “Even though some down payments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity.”

Stating that many who purchased their home even a year ago have sufficient equity to withstand a price correction, Greenspan outlined his belief that it is unlikely housing prices could become severely distorted given the diversity and size of the United States. “If lenders, including community bankers, continue their prudent lending practices, household financial conditions should be all the more likely to weather future challenges,” said Greenspan.

Despite speculation that home values have grown inorganically, there has been little evidence to bring action from the industry. To the contrary, home equity borrowing has continued in the wake of the refinance boom and home equity lenders have benefited from aggressive and responsible products.

Across the nation homeowners have enjoyed the benefit of increasing home values that proved quite valuable during the refinance boom. Refinancing to take advantage of historically low interest rates, the increase in home value provided extra cash to homeowners. With interest rates beginning to climb and the refinance boom over, homeowners are still taking advantage of rising values; now, however, through flexible second mortgage options.


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