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.