Friday, May 20, 2005

After Years Of Inaction, He'll Talk The Bubble Down

Alan Greenspan is talking about housing again. "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. The Fed chairman said the more rapid pace of second home purchases may reflect speculation in some markets."

"'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. '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. This has been a major force in financing consumption expenditures.'"

Here's AG on the GSE's. "As Fannie and Freddie increase in size relative to the counterparties to their hedging transactions, the ability of these GSEs to quickly correct a misjudgment in their complex hedging strategies becomes more difficult, especially when vast reversal transactions are required to rebalance portfolio risks."

21 Comments:

At 1:18 PM, Blogger John Law said...

greenspan might as well just say "my economy sucks."

hey, look at meeeeee!!! as long as people keep going into debt and mortgage their home to the hilt, I'm the greatest banker ever!

 
At 1:20 PM, Anonymous Anonymous said...

Is GAO (Gov't Accounting Office), the government's inspector-general, able to investigate Fannie and Freddie's books and practices?

 
At 1:35 PM, Blogger Ben Jones said...

1:20 anon,
I don't think they could step over the SEC to do it. This whole mess is being handled very gingerly. Other companies would be bankrupt or delisted by now.

 
At 1:44 PM, Anonymous Anonymous said...

Greenspan's quote - from CR blog item:

"Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems," he said.

Is he trying to call the top or what?

 
At 1:47 PM, Anonymous Anonymous said...

I have already heard the comparison to the "irrational exuberance" quote which he made 4 years before the market collapsed. The spin being that the housing bubble has another 4 years.

 
At 1:49 PM, Anonymous Anonymous said...

1:44 -- "Is he trying to call the top or what?"

Exactly what I thought when I read that -- AG has just called the top.

 
At 1:56 PM, Anonymous Anonymous said...

So your saying we have another 4 years to go?

 
At 2:00 PM, Anonymous Anonymous said...

I have no idea how far we have to go. 4 years is almost impossible for me to imagine. But, that is the spin a guy on bubblevision implied.

 
At 2:06 PM, Anonymous Don said...

"Stocks have reached what looks like a permanently high plateau."
--Irving Fisher, Professor of Economics, Yale University, Oct. 17, 1929.

Didn't take 4 years after that one. It had already started.

http://cowles.econ.yale.edu/news/shiller/rjs_97-01-13_wsj_stock.htm

 
At 2:46 PM, Blogger desi dude said...

http://www.firstamres.com/pdf/Cagan_FireBurn_1104.pdf

Here a realestate professional already called top for SoCal.
(link copied from WSJ forum)

 
At 2:47 PM, Anonymous stock jock said...

(The spin being that the housing bubble has another 4 years.)

At the time Greenprint made his famous "irrational" speech in 1996, the Nasdaq had tripled in the previous five years, from 400 in 1991 to 1200.

Of course, the Netscape IPO in 1995 fueled much of the excitement. But Greenspan's comments plunged the markets briefly in 1996. Much of the liquidity in the market had come from the Fed during the 1994-95 Mexican peso crisis. Greenspan added fuel to the fire in 1997 during the Asian currency crisis. And again in 1998 during the Long-Term Capital Management hedge fund meltdown. And again in 1999 during the Y2K scare.

So while Greenspan spoke of irrational exuberance, he pumped liquidity year after year after year to stave off "crisis" after "crisis"---real or imagined. And the markets responded. If he thought the market was exuberant from 1991-1996 when the Nasdaq tripled, what must he have thought from 1996-2000 when the Nasdaq gained another five-fold. But no bubble, of course. Too hard to see, he says.

My guess is that at some point this year, another crisis---real or imagined---will occur. Maybe it will be hedge fund related. Maybe derivatives. Maybe a currency shock. Maybe housing related. No matter, the stock market will take a 10-15% nosedive. And Greenspan will be there at the ready, pumping liquidity as he always does. Maybe even lowering interest rates just for the fun of it.

And that's how housing could live to see another day.

I know it's hard to imagine how homes could rise further. But who could have, in their wildest dreams, believed that the Nasdaq could climb from 400 to 5000 in less than nine years---a 20-fold gain. That's the magic of pumping liquidity at any sign of trouble---real or imagined.

But don't ever call it a bubble, Uncle Al the Banker's Pal says you can't tell until it pops...

 
At 3:39 PM, Anonymous Anonymous said...

Stocks are completely divisible. There is not much emotion about not owning a certain quantity.

However, homes are different. If prices are doubled, it is impractical to buy half a home with the same amount of money.

What stops housing prices from going up is not rising interest rate. It is the shift in expectation that we are seeing more and more recently.

Once the new expectation of falling home prices is set and reinforced, lowering fed fund rate to 0% will not be sufficient to reverse the trend. (Look at Japan)

 
At 4:07 PM, Anonymous JJL said...

I dont know whats worse for Greenspan, being the architect of the stock market bubble and not knowing it, being the architect of the real estate bubble and just beginning to see how far down the rabbit hole goes, or being married to the creepy looking communist Andrea Mitchell! Any votes?

 
At 5:00 PM, Anonymous Anonymous said...

I am sure we are all sick of hearing all these predictions of when the bubble will burst. I know I am. Hey lets look at some facts. Are homes too expensive now? If yes then its time not to buy. When the seller's don't have buyers then it become buyer's market. Just be smart.

 
At 10:54 PM, Anonymous Anonymous said...

in the Houston crash in the mid-80's prices needed hits of 50 to 80% before the real vulture buyers came in, basically east coast buyers like myself

There is absolutely no doubt that a number of regions are in a bubble phase

The only question now is whether it 1. crashes 2. or via a "soft landing" just flattens for an extended period such as 8 to 10 yrs - to let rents catch up with market values

Anyone buying on slight dips in thse bubble areas is looking for problems

In yr 2000, people were BARGAIN buying optical equipment stocks such as JDSU when it dipped for example from a (pre-split) 260 in FEB 2000 down to around the 140 range in subsequent months

Today of course JDSU sells for around 2 dollars a share of around 4 to 5 in pre-split 2000 terms

Stocks headed down in fact are far more liquid than real estate, so many were able to unwind JDSU at 100/sh - taking only a 50% to 60% loss instead of a 98% loss by holiding for a few more yrs.

Any real estate crash, should it occur c/b very unpleasant

 
At 11:41 PM, Anonymous Anonymous said...

Soft landing is a pipe dream for marktets with P/E ratio higher than 30. It will take a really long time for speculators to sit tight and "subsidize" rent with no prospect of appreciation in sight.

 
At 12:29 AM, Anonymous Anonymous said...

"Stocks headed down in fact are far more liquid than real estate"

Many dot-com survivers do not know this. They sold stocks at the 2000 peak and they think they can do it again.

 
At 12:36 AM, Anonymous Anonymous said...

". And Greenspan will be there at the ready, pumping liquidity as he always does. Maybe even lowering interest rates just for the fun of it."

I liked your AG analysis overall. AG will have a heck of time lowering interest rates in response to any shock in the system right now, mostly because short rates are already slightly below even the Fed's crooked inflation numbers.

That's the main reason the Fed has to continue to raise rates in the next several meetings. They are trying to build a reflation buffer so that when the next "crises" emerges they will have some ammo. Right now they have no bullets in their gun and thus are in a precarious situation. Who knows if they will be able to get enough of a buffer before the next crises?

 
At 7:02 AM, Blogger deb said...

Anon 3:39 wrote "Stocks are completely divisible. There is not much emotion about not owning a certain quantity.

However, homes are different. If prices are doubled, it is impractical to buy half a home with the same amount of money."

I completely agree. With stocks there really is no ceiling to how high prices can go. With homes, people have to qualify for the mortgages (and the lenders have to be willing to loan). With stocks, once you have bought them, you own them as long as you like. With homes, there is a huge cost of ownership. Thousands of dollars per month in PITI plus upkeep, etc. These costs can become unaffordable to a borrower.

There is a limit to how long this can continue. Seems like the lenders are suddenly under a lot of pressure to cut back on the creativity.

 
At 9:32 AM, Anonymous Anonymous said...

OFHEO not GAO is the GSE regulator. The GSEs were sure to buy off congress (read: lobbyists) to make sure that OFHEO was ineffective at watching the hen house. It wasn't until there were widespread accounting problems at the GSEs that the money sucking members of congress couldn't deny new regulation any longer. OFHEO had been trying to get stricter regulation passed, but over the previous three years nobody would touch the bill. Magically, there is widespread support for it this year (read: congress knows the goose is cooked). The slimeballs at the GSEs paid to have the brakes removed from the car. We will all pay heavily for it. http://www.gsereport.com/ has some
good information for the curious.

 
At 9:54 AM, Blogger Ben Jones said...

9:32 Anon,
Good points, and the GSE report is a great resource.

 

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