Greenspan Says Housing Market `Speculation' Is Unsustainable

Some regions of the U.S. housing market are showing signs of unsustainable ``speculation'' and ``froth'' based on fast turnover of existing homes, Federal Reserve Chairman Alan Greenspan said. The price surge may ``simmer down'' as housing becomes less affordable, he said.

``It's pretty clear that it's an unsustainable underlying pattern,'' Greenspan said in response to a question after a speech on markets to the New York Economic Club. ``People are reaching to be able to pay the prices to be able to move into a home.''

``There are a few things that suggest, at a minimum, there's a little froth in this market,'' Greenspan said. While ``we don't perceive that there is a national bubble,'' he said that ``it's hard not to see that there are a lot of local bubbles.''

Combined sales of new and existing homes, townhouses and condominiums have set four straight annual records, aided by low mortgage rates. The median existing home selling price will rise 7.1 percent this year to $198,400, according to the National Association of Realtors' latest forecast. Sales of new and previously owned homes are expected to total 7.87 million this year, trailing only last year's record.

There is no national bubble because homes purchases are too expensive and complicated to foster that kind of investment, Greenspan said. Because the U.S. real estate market is composed of individual regions with different pricing trends, a collapse that damages the overall economy is unlikely, he said.

Shares of homebuilders fell or extended losses after the remarks, including Toll Brothers Inc. of Horsham, Pennsylvania, and Pulte Homes Inc. of Bloomfield Hills, Michigan. The Standard & Poor's Supercomposite Homebuidling Index declined 1.1 percent as of 2:30 p.m.

Investors

Fed economists have determined that second home purchases are partly responsible for driving up the ratio of sales to the existing housing stock, Greenspan said. Because buyers wouldn't face relocation costs, the Fed chairman said the more rapid pace of second home purchases may reflect speculation in some markets.

A survey the Realtors group released March 1 found that 23 percent of homes sold in 2004 were purchased by investors.

``When you get speculation, there are only a couple of ways for it to end, and they are not good,'' said Jay Mueller, senior portfolio manager at Wells Capital Management, a Menomonee Falls, Wisconsin-based division of Wells Fargo & Co. ``We are nowhere close to income growth matching house price appreciation.''

There's a risk that consumer consumption may decline if the housing market slows, Greenspan said. ``If it occurs, and eventually it will, it will reduce the fairly large and still accelerating degree of extraction of equity from existing homes,'' he said. ``This has been a major force in financing consumption expenditures.''

`Simmer Down'

While Greenspan didn't explain why he expected the surge in home prices to ``simmer down,'' he noted that buyers have to resort to unusual financing techniques, such as interest-only loans, to afford homes now.

Earlier this week the Fed and other banking regulators warned banks that they should tighten controls on home equity loans that they said are too often offered with no documentation of a borrowers assets.

Long-term interest rates have added fuel to the home price surge. Yields on U.S. government 10-year notes stand at about 4.12 percent, down from about 4.7 percent a year ago.

David Berson, chief economist at Fannie Mae, said in a report this week that the affordability of homes in some regions is at its lowest level since the mid-1980s because of huge prices increases. Nationally, housing affordability, a function of prices, mortgage rates and income growth, is in the middle of its 10-year range.

Median Prices

The median selling price of a previously owned home rose to a record $195,000 in March, the latest statistics from the Realtors group showed. Compared with the same month in 2004, which was a record year for home sales, the median price has increased more than 11 percent. Previously owned homes account for 85 percent of the residential real estate market.

Three metropolitan regions in Florida led the nation in price growth, according to the group. The strongest price increase was in Bradenton, where the first-quarter median price of $275,000 was 46 percent higher than the same period in 2004.

In the San Francisco Bay area, the nation's most expensive region for homes, the median price was $689,200.

``Low mortgage interest rates are drawing new households into the market, but some are disappointed by their inability to find a home that meets their needs,'' said David Lereah, the Realtors group's chief economist, in a May 12 statement.

The average rate on a 30-year fixed mortgage this year has averaged 5.78 percent, close to the four-decade low of 5.21 percent that was reached in 2003, according to mortgage purchaser Freddie Mac.

``Continuing low rates will keep the housing industry abuzz,'' Frank Nothaft, chief economist at Freddie Mac, said yesterday. ``It is remarkable how mortgage rates have remained so low for so long.''