Greenspan: Future Remains Uncertain For Housing by Broderick Perkins
Federal Reserve Chairman Alan Greenspan's latest speech on the housing market should lift the spirits of home owners who have been repeatedly warned of impending doom, but that doesn't mean the market won't bite you in the bucks if your timing is off. In a speech squarely aimed at falling-sky forecasts from economic and real estate experts, soothsayers, prophets and seers, Greenspan said what the sober already know. If the sky falls and you already own a home, plan to stay put, if you don't already, and just wait out the storm. Chunks of falling prices will land hard on speculators and those who purchased homes at peak price and must sell before the market recovers. Fortunately, for the housing market in general, those risk-taking short-term buyers represent only a small part of the nation's real estate economy. "It is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," said Greenspan a week ago in remarks before a session of the American Bankers Association's annual convention in Palm Desert, CA. Greenspan said even where home prices have most appreciated, the fast run up in values have helped keep loan-to-value (LTV) ratios low. Even when the heavy leverage of low down payments and creative financing was used to purchase homes, buyers have recovered, thanks to speedy appreciation. "The LTVs for recent home buyers appear to be lower in those states that have experienced the most explosive run-up in house prices and that, conceivably, could be at risk for the largest price reversal," said the Fed chairman. He reminded his audience that the real estate market is largely a heterogeneous entity, a collection of local markets loosely connected by mortgage interest rates, migration and construction capacity, and as such, does not lend itself to blanket forecasts. Most buyers buy homes to live in and don't contribute to rising home prices or reap sales-based equity gain until they actually sell them and move on. "In today's climate, buyers need to remain cautious and invest wisely. The housing bubble is less likely to burst than just float along, but buyers need to get back to the basics of real estate: location, location, condition. A home in a great location will be a good long-term investment, even if housing prices dip," said Kathleen Kuhn, president and CEO of Housemaster, one of the many experts offering advice. Greenspan did direct warnings at the ever-growing market of exuberant second home buyers and their speculating partners who buy low to sell high. Joshua Stein, a partner at Latham & Watkins LLP and chair of the New York State Bar Association's real property law section chimed in, "Booming values along both coasts are turning wastelands into boom towns. People who owned buildings with nominal value suddenly turn out to be sitting on goldmines -- perfect development sites suddenly worth millions of dollars. As these accidental real estate players get drawn into complicated agreements, what happens when they get in over their heads?" Because second home and investment buyers typically have an owner-occupied residence and need not move to sell their second home or investment property, sales are not as constrained, allowing them to move property quickly and frequently. That may be putting more upward pressure on prices than the friendly neighborhood home buyer who stays put. "In recent years, the pace of turnover of existing homes has quickened. Apparently, a substantial part of the acceleration in turnover reflects the purchase of second homes--mainly for investment or vacation purposes," Greenspan said. "Transactions in second homes, of course, are not restrained to the same degree as sales of primary residences--an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past," he added. Greenspan indicated that buyers putzing around buying a home, especially a second home or speculative property at peak price time, lured by the easy money of interest-only, piggy-back and option-ARMs is taking the riskiest position, should prices plummet. "The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is adding to the pressures in the marketplace," he said during the speech. An Alamo, CA-based real estate investor and publisher for decades, John T. Reed, recently attempted to give all the bubble hoo-haa a less-frenzied perspective by referring to a Harvard University Joint Center For Housing Studies report which indicates the current housing boom is 13 years old. The previous record was only five years. "People tend to adopt their economic views when they come of age in their early 20s. That is, they tend to view whatever the economic situation was when they were in their early twenties as normal and all subsequent deviations from that as abnormal," Reed said. If Reed's hypothesis is correct, that human condition of denial is currently working inside today's thirty-somethings still waiting for a dot com boom like the one they experienced when they were in their 20s. "Imagine spending the rest of your economic life preparing for that nonsense to come back," Reed said. His point is that economic conditions tend to ebb and flow in cycles with some regularity, but certainly not always and no one period ever truly mirrors another for a host of reasons. The real estate market economy is no different. The boom could last another 13 years. It could go bust for 10. It could flatten and remain mired for years. No one really knows for sure. What the economic models simply can't factor are a host of human conditions and those over which frail humans have no control. Unforeseen events have a way of showing up and gumming up the works, well, when you least expect them. Forget interest rate hikes, peak oil, war and terrorism. Mother Nature alone, with another hurricane or two in a storm season yet to end, with a major quake, or with some nasty winter blizzards, a flu epidemic or some combination of disasters could turn the slippery U.S. economy on its head. "There is nothing so constant as change," said Reed. The drum beat of what is to come will ever remain an unfinished symphony -- well at least until the fat lady sings. "The situation clearly will require our ongoing scrutiny in the period ahead ..." Greenspan summed up. | 
