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Greenspan Says Housing Boom to `Simmer Down,' Prices May Fall
Aug. 27 (Bloomberg) -- The U.S. housing boom is sure to end eventually, slowing spending and possibly leading to a drop in home prices, Federal Reserve Chairman Alan Greenspan said.
``The housing boom will inevitably simmer down,'' Greenspan said in the text of a speech at the close of a two-day Kansas City Fed symposium in Jackson Hole, Wyoming. ``As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease.''
Greenspan's comments suggest economic growth would slow as the housing surge subsides, reducing pressure on central bankers to raise interest rates and helping ease imbalances in the world's largest economy. A day earlier Greenspan urged investors not to forget about the possibility that asset prices may fall.
The eventual end of the boom will cause U.S. consumers to take out fewer home-equity loans, giving them less money to spend. That in turn may increase the savings rate and ease the import-driven current account deficit, he said, adding that the shift needn't be ``wrenching'' if the economy remains flexible.
``Home equity extraction will ease and with it some of the strength in personal consumption expenditures,'' Greenspan said.
Consumer spending accounts for about 70 percent of the nation's economic activity. Consumers have tapped about $1.62 trillion of housing wealth through equity loans since 2001 and spent as much as half of that, according to Jan Hatzius, a senior economist at Goldman, Sachs & Co. in New York.
Greenspan Era
Consumer spending, buoyed by borrowing against rising home values, helped push economic growth above 3 percent for nine consecutive quarters. The Fed's interest rate-setting Open Market Committee has raised the federal funds rate at 10 straight meetings, pushing the benchmark to 3.5 percent from 1 percent as it tries to control inflation.
The speech was most likely Greenspan's last speech as Fed chief at the annual Jackson Hole gathering of the world's top economists and central bankers. The 79-year-old Greenspan, who steered the world's largest economy for the past 18 years, plans to retire after his non-renewable term as a Fed governor ends Jan. 31. The topic of this year's symposium was ``The Greenspan Era: Lessons for the Future.''
Greenspan's remarks reveal more of his thinking on a boom that pushed home values up by 50 percent in the five years ended March 31, according to figures from the Office of Federal Housing Enterprise Oversight. Economists including Morgan Stanley's Stephen Roach and Merrill Lynch & Co.'s David Rosenberg have said Greenspan created risks by allowing housing to become a so-called bubble.
Asset Prices
Greenspan has resisted calls to raise rates specifically to target housing prices and has defended the Fed's decision not to move against technology-stock prices in the late 1990s, saying the central bank couldn't lower asset prices without damaging the broader economy.
``The configuration of asset prices is already an integral part of our evaluation of the large array of forces that influence financial stability and economic growth,'' Greenspan said today. ``But given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon.''
The Fed may welcome some slowing of consumer spending. Central bankers have been pushing rates up for more than a year, hoping to keep inflation in check. The economy will expand at a 4.1 percent annual rate in the current quarter, according to the median estimate of 66 economists surveyed by Bloomberg News.
Current Account
``An end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports, and a corresponding improvement in the current account deficit,'' Greenspan said today.
The U.S. current-account gap grew to $195.1 billion in the first three months of the year, the Commerce Department said June 17. The nation's trade deficit makes up the majority of the current account gap, which now equals a record 6.4 percent of gross domestic product.
Greenspan also warned the Jackson Hole audience about the U.S.'s other major imbalance, the federal budget deficit.
Monetary policy ``cannot ignore the potential inflationary pressures inherent in our current fiscal outlook, especially those that could arise in meeting commitments to future retirees,'' Greenspan said.
The budget deficit rose to a record $412 billion last year. While the Congressional Budget Office says the gap may narrow to $331 billion this year, the CBO said the government would run a total of $2.1 trillion of deficits over the next decade.
`Stark Choices'
``I assume that these imbalances will be resolved before stark choices again confront us,'' Greenspan said, suggesting Congress and the executive branch still have time to act to head off a crisis.
Greenspan helped convince lawmakers to pass deficit reduction measures in 1991 and 1993. Today he cautioned government officials not to expect his successors at the Fed to bail them out by printing money if they fail to address deficits this time.
``The Fed would resist any temptation to monetize future fiscal deficits,'' Greenspan said. ``We had too much experience with the dangers of inflation in the 1970s to tolerate going through another bout of dispiriting stagflation.''
Last Updated: August 27, 2005 13:34 EDT
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