Alan Greenspan, the controversial former Fed Chairman, in an interview by the Wall Street Journal’s David Wessel gave us a few pearls of wisdom to ponder about the state of the housing market.

He starts out with a prediction calling for a stabilized market by summer of 2009. Greenspan admits depending on the size of the bubble certain location will see continued price declines after his deadline. But for the majority of markets, a never-ending price depreciation will end about a year from now…and I happen to agree with him on this point.

Denver, where I live, was first into the bubble (a smallish bubble at that) and will be the first out. We are already seeing signs of this as the Case-Shiller Index for Denver was up for 2 months in a row in May and June. However, Phoenix, Las Vegas and other markets like them were late to the bubble party and saw bigger price appreciation, so they won’t hit Greenspan’s target but will follow soon after.

Greenspan bases his prediction on supply versus demand statistics as well as rent versus own price corrections. He states it best by saying,

“It’s the imbalance of supply and demand which causes prices to go down, but it is ultimately the valuation of the commodity which tells you where the bottom is.”

He uses the current figure of 800,000 vacant homes and figures it will take a year to liquidate enough of those homes at lower and lower prices, that an equilibrium will be hit when investors feel the desire to hold on to the home rather than sell…put another way, when it costs more to rent than to own.

I like this dual methodology for analyzing the bottom in the housing market. Historically, home owners had to see a benefit from owning versus renting and landlords needed a premium to stay landlords. Greenspan knows a “corrected” market will return us to that state. He also informs us the number of households created in a year in the US today is 800,000…the same number as vacant homes, so the supply/demand component is covered too.

If prices could drop fast enough to make a mortgage payment less than rent for the same house…violia…the bottom is reached.

He warns against too much legislation, tax incentive, or bail out activity which could slow the speed in the drop of housing prices. Subsequently, he voiced he dissent on the GSE bailout by saying,

“They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted — with necessary taxpayer support to make them financially viable — as five or 10 individual privately held units,”

Greenspan fears a huge taxpayer bill coming due for Fannie Mae and Freddie Mac thanks to Hank Paulson’s new law…and I share his concern.

Wow…I agree with Alan Greenspan a lot here…I’d better go lay down.

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Tags: Alan Greenspan, fed, federal reserve, The Fed

The Fed Moved! Freaking amazing when you think about it. The first few words to appear in the first paragraph of an updated New York Times posting are :” The Federal Reserve moved…”

Now this may seem like a fairly benign statement until you consider this: Had the Federal Reserve moved say, six or seven years ago, we might not be in this mortgage/housing/credit/banking crisis that we find ourselves in, along with much of the rest of the developed world.

How do we know this?

According to a Times article from Washington, some seven years ago, Edward Gramlich, then a Federal Reserve governor, warned that “a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.”

Sound familiar? It should. It’s the root cause of the chaotic financial mess that has engulfed us like a mountain lion chomping down on a parakeet. (And no, I don’t know if mountain lions even like parakeets or even know, for that matter, what a parakeet looks like.)

BUT…reportedly, when Gramlich tried to nudge the Fed to move and take a closer look at the developing mortgage lenders/national banks connection, then Fed chairman Alan Greenspan told him to f— off! Okay, maybe Greenspan didn’t actually tell Gramlich to f–off; but, he clearly wanted to because Greenspan sat on his butt and did, hold on to your seats, nothing.

In fairness, which I am not inclined to be, mind you, Greenspan told the august Times that the reason he sat on his butt was because the Fed was “poorly equipped to investigate deceptive lending” and, is “not to blame for the housing bubble and bust.” Poorly equipped? The U.S. government? I mean, could the Fed have at least rounded up a few of those college intern-types to do the heavy lifting and help with the much needed investigations?

The reason, other than spite, for bringing up the non-movement of the Fed seven years ago, is to contrast it with what has apparently just happened as I sat down to write this post. What has happened now is…….The Federal Reserve moved! It came up with some new restrictions to curb unfair and deceptive home-lending practices, reports the Times.

Voting 5-0, the Fed opted to “tighten provisions meant to protect borrowers and apply them to a far larger share of home loans.”

After a period to permit public commenting, the proposed new rules could go into effect next year.

Now then, the Fed is doing all this using its power under the Truth in Lending Act as well as the Home Ownership Equity Protection Act. And, you know when that act went on the books?

All the way back in 1994. Which brings us back to the now very dead Edward Gramlich who wanted his own agency to do something seven years ago when Greenspan now says the Fed lacked the equipment to move. Nonsense. It had all that was needed in 1994.

Gramlich must be turning in his grave, his corpse practically shouting out to Greenspan : “I told you so, you shmuck!” or words to that effect.

But, in the meantime, let us all take solace in the fact that The Fed Has Moved!

Tags: Alan Greenspan, federal reserve, mortage crisis, The Fed

Alan Greenspan revealed more about his thoughts on the Housing Crisis in Vienna, Austria today:

“So far, prices have dropped only slightly. But it was enough to cause alarm around the world,” he said. “Prices are going to fall much lower yet.”

“The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure”

Convinced yet?

Source: Yahoo Business

Tags: Alan Greenspan, bonds, fed, federal reserve, Housing, housing, housing crisis, Interest Rates

According to the man who has been touted as the greatest central banker we’ve ever had, Alan Greenspan revealed yesterday that he dropped the ball during the birth of the Sub-Prime Mess. According to Greenspan in a 60 Minutes interview, “While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late . . . I really didn’t get it until very late in 2005 and 2006.”

This deeply troubles me. I can’t fathom how I and others had an understanding that what was going on was sure to lead to a horrific economic crisis, but Greenspan was out in the dark. I wonder if the central banker simply had too much on his plate, or if his isolation in DC led to his lack of awareness.

I return to the example I’ve given dozens of times of a young policeman in LA who was able to purchase a million dollar home using an option ARM loan. While I was skeptical of things prior to learning of this man’s story, it really did put things into perspective for me. I knew then that we were in for some real troubles ahead. It is all about the math . . . the average policeman can’t afford $4,000+ or $5,000+ a month on a note, and whenever this guy’s mortgage was set to reset, he was going to lose his home. When everyone I knew back in 2003 was talking about how how much money they were going to make in real estate, I knew something was wrong. It just looked too much like the Dot-Com bubble.

This bubble seems to have much larger implications, however . . .

Knowing that Mr. Greenspan failed to recognize the obvious (along with millions of other frenzied investors, home-owners, real estate agents, lenders, etc.) has actually begun to ruin his reputation.

That said, many economists are finally saying that he should have been calling for increased regulation of the mortgage business, and that he left rates too low for too long. It is easy to come out as a Monday morning Quarterback and go after him now, but where were they when all of this was going on? Most of them were busy sowing the spoils we helped to create.

So where are we now?

Many of the same economists are now predicting that we are headed for a recession unlike any we’ve seen since WWII. I’m thinking that they might finally be on point with their predictions.

Thanks for everything Mr. Greenspan (and all others who could have done something about this, but were too busy getting fat off of the booming housing market at the time)!

Tags: Alan Greenspan, Economy, fed, fed-chairman-greenspan, Greenspan, Housing, mortgage crisis, sub-prime, subprime