Greenspan On Where a Second Housing Break Will Cause Massive New Foreclosures

Former Fed Chairman is a trend follower when it comes to the overall economy. Thus in his appearance Sunday on ABC News' This Week, he is much more optimistic about the economy than he was a year ago. However, trend following is about as useful in forecasting future events in the economy as projecting the future weather in New York City for January 2010, by extrapolating August 2009 weather, i.e., totally useless.

However, where Greenspan can be of value is when he points out certain facts and break points because he does look at data very closely. He will know breakpoints. Thus, I found his comments on the housing market quite instructive:

STEPHANOPOULOS: Well, the Case-Shiller has shown that they probably have stabilized some.

GREENSPAN: Well, they have stabilized temporarily. And the problem with the data on home prices is they're very difficult to measure in their regional data.

It is possible. I don't think it's going to happen, but I do think it is possible that we could get a second wave down. But the important issue is, if we don't -- and I think the probability is that we won't, that we are close to stabilization.

Under those conditions, you will begin to get a very significant change in the underlying confidence in the consumer area.

STEPHANOPOULOS: And then you might see that in the consumer area; you might see that in the stock markets. So that is the -- is the trigger, possibly -- you say it's unlikely -- that that could be the trigger to a second dip?

GREENSPAN: If you get another dip and a renewed decline in prices, we're going to run into an acceleration of a number of homes that are mortgaged and are underwater; that is that the value of the properties are less than the debt.

If that happens -- and, clearly, looking at the structure of where debt and values, it would, if, for example, home prices fell by 10 percent or more, that would create a major acceleration in foreclosures. And I think it could be a factor...

What Greenspan has done here is look to see at what point a further decrease in housing prices creates a significant increase in foreclosures. Cranking out the numbers, he tells us it is 10%. I have no reason to dispute this number.

Thus, while Greenspan remarkably, doesn't seem to watch money growth, or the current lack of it, the slowdown in money supply will cause a second dip in the economy. If the break is strong enough to push home prices down by 10% (and this appears to be a strong possibility given how long money growth has slowed) all hell will break loose in the financial sector, again.

Stay tuned.