Posted on 03/04/2003 3:21:56 PM PST by MeneMeneTekelUpharsin
WASHINGTON (Reuters) - The five-year-old U.S. housing boom is likely to slow in 2003 and could dampen consumer spending, which has been fueled by the thriving housing market, Federal Reserve Chairman Alan Greenspan said on Tuesday in comments that rattled housing markets. "With home price increases now subsiding, and mortgage interest rates no longer declining at last year's impressive pace, some slowdown in the rate of mortgage debt expansion is to be expected," he told a conference of the Independent Community Bankers of America in Orlando, Fla., via satellite.
Shares of homebuilder stocks tumbled as the Fed chairman, while ruling out a national housing bubble, raised the specter that the torrid pace of house price increases could slow and even decline in some regions. "Clearly, after their very substantial run-up in recent years, home prices could recede," Greenspan said. Greenspan's comments fed fears about the stamina of consumer spending and housing -- both of which have cushioned the impact of weakness in the broader economy. Reports out this week showed retail and auto sales have weakened.
"The thought process is that the consumer is sort of hunkering down, and the appetite for real estate is exhausted at this point," said Matthew Johnson, managing director of trading at Lehman Brothers. The Standard & Poor's Homebuilders Index fell about nearly 7 percent while the Dow Jones Industrial Average closed down 1.7 percent.
COMMENTS CALLED "STUNNING"
Analysts said the fact that Greenspan raised the possibility of home price declines could have a chilling effect on the housing market. His words, always closely watched by financial markets, caught some housing observers off-guard. "All of a sudden -- after all he has said about the house price topic -- to say home prices could recede, I think struck people, at least those who follow this sort of thing, as stunning," said David Seiders, chief economist for the National Association of Homebuilders.
"Greenspan's comments showed there is a genuine nervousness about housing," said Hugh Johnson (News), chief investment officer at First Albany Corp. "And the rise in the activity and price of housing has resembled the technology and telecoms bubble." The Fed chief said it was "a rather large stretch" to compare the housing market with the 1990s high-tech surge. However, he did say it was unreasonable to expect rises in home prices -- which surged 7 percent in 2002 and by one-third in the past four years -- to sustain such a swift pace. In fact, the pace slowed sharply in the second half of 2002 despite record low mortgage rates and record home sales.
The housing market kicked off 2003 with a mixed performance. In January, new home sales fell 15.1 percent, but existing home sales rose 3 percent to the highest monthly rate on record, according to government and industry data. Median prices of new and existing homes slid in January versus December, but were higher than a year earlier.
LOCAL DECLINES POSSIBLE
Greenspan sought to quell fears of a national housing bubble but raised the possibility of localized danger spots. "Any bubbles that might emerge would tend to be local, not national, in scope," he said, adding that demand for homes still remains resilient. "There is little indication of a supply overhang in newly constructed homes," he said. Housing activity is more likely to be hit by rising interest rates than by sliding home values, Greenspan said, adding that mortgage rates, now at the lowest levels since the early 1960s, spurred the five-year housing boom. In addition, any interest rate rise would likely be the result of an improvement in business activity and a resurgent economy, which would limit the net effect on housing. Still, Greenspan said the pace of homeowners extracting cash from mortgage refinancing -- which has supported consumer spending -- is also likely to slow.
"The frenetic pace of home equity extraction last year is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services," the Fed chairman said. Separately, Atlanta Federal Reserve Bank Chairman Jack Guynn said consumer spending is unlikely to post anything more than "modest" growth in the near-term, making the recovery of business spending increasingly important for the economy.
Say that 10 times fast <VBG>
I totally agree, ASSUMING... one stays adequately employed and does not S.T.R.E.C.H.... to afford a home!
I respectfully disagree. I just can't see how people are going to pay for homes which are overpriced when the can't find jobs with commensurate salaries. Can't see it.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.