Friday, June 03, 2005

Greenspan uses F-word to describe real estate

But Fed chair does not see significant price declines

Long Treasury rates stayed in a 4 percent-4.09 percent band, and mortgage rates grudgingly acknowledged the improvement, dipping just below 5.625 percent.

Economic data played no role. First-quarter GDP was revised upward to 3.5 percent, as anticipated, confirming that an apparent early-spring slowdown was a mirage.

All week long, the financial markets were dominated not by data, but by chatter. The loudest: housing, housing, housing, bubble, bubble, toil and TROUBLE!

Federal Reserve Chairman Alan Greenspan turned up the eye-of-newt volume: "We don't perceive that there is a national bubble, but it's hard not to see...that there are a lot of local bubbles."

Oh, really. This from the man who as late as 2000 refused to use the words "bubble" and "stock market" in the same sentence, except to say that a bubble could only be detected in retrospect? That markets must be trusted? That the Fed should not attempt to intervene, and instead should wait, repairing any damage from a blown bubble after detonation? That same guy, who wouldn't snip margin loans?

Yeah, that guy. He has aged visibly; his exceedingly precise use of language departing. Perhaps he didn't quite mean what he said. In all this housing shouting, there is a terrible problem with terminology. A real bubble is price-bloat followed by a crash; not a mere "correction" (a 10 percent drop in price is the limit for that euphemism), not a "retracement" (a one-third decline), but an honest-to-Pete crash. Authentic bubbles: the Nasdaq is still 60 percent below its bubble top; the Nikkei fell 80 percent from its 1989 peak at 38,134, and today still languishes 70 percent below.

Are several local housing markets over-extended? Sure. Are some current rates of appreciation "unsustainable?" Of course. No market for anything can compound at 20 percent per year for long. But, are home prices poised for the 33 percent-plus decline required to classify as a bubble? Not even the Chairman thinks so, pointing to losses ahead only for latecomers to the party. Housing is NOT in a bubble; in places it is overdone and due to correct, painfully for some, but not free-fall.

Read the entire Inman News article by Lou Barnes

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