Greenspan Takes A Shot At Calling The Bottom In Housing

Alan Greenspan has taken a lot of heat for his role in creating the housing bubble and his attempts to paint a picture that removes him from the scene of the crime. Charges that Greenspan was a a major factor responsible for the housing bubble rest on a strong factual basis of Fed money printing during the Greenspan Era at the Fed. However, the dissing of Greenspan has gone well beyond his role in the housing disaster. If Greenspan were to pronounce that the moon circles the earth, there would be critics today. This leads us to new pronouncements from Greenspan with regard to his analysis of when the housing crisis might bottom.

We contend that Greenspan is one of the best analyzers, in the country, of economic data, and when he doesn't have a political agenda or agenda to protect his disintegrating reputation, he can provide insights into economic numbers that few can. There's no obvious agenda, outside of being accurate, for Greenspan's recent comments to WSJ's David Wessel, on the housing market. Thus, it makes sense to carefully consider these Greenspan comments made to Wessel:

Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009...he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond...

His desk, couch, coffee table and conference table are strewn with print-outs of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.

An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said.

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet -- and hence banks' capital -- until then."...

Mr. Greenspan's housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" -- roughly 800,000 units above normal -- diminishing soon. The other is a comparison of the current price of houses -- he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas -- with the government's estimate of what it costs to rent a single-family house. As other economists do, Mr. Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door.

"It's the imbalance of supply and demand which causes prices to go down, but it's ultimately the valuation process of the use of the commodity...which tells you where the bottom is," Mr. Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It'll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level."

Here's another interesting insight Greenspan made during the Wessel interview:

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."