| Vacation home sales are at unprecendented levels Original Source Link: (May no longer be active) http://quote.bloomberg.com/apps/news?pid=10000006&sid=aMteQwh5xdME&refer=homehttp://quote.bloomberg.com/apps/news?pid=10000006&sid=aMteQwh5xdME&refer=home
Greenspan Says Speculation Adds to Home-Price Surge (Update2)
Sept. 26 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said speculative home buying may be driving the surge in housing prices and creating greater risk for homeowners who rely on interest-only mortgages.
Sales of vacation houses, or homes that aren't always occupied by owners, are ``arguably at historically unprecedented levels,'' Greenspan said in the text of a speech to the American Bankers Association annual convention in Palm Desert, California. ``This suggests that speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past.''
Sales of previously owned homes unexpectedly surged in August, and prices reached an all-time high, a report from the National Association of Realtors today showed. The median price rose 15.8 percent in the last 12 months, the biggest jump since 1979, to a record $220,000.
Greenspan drew his conclusions in part from an 83-page research paper he published today on the Fed's website with staff member James Kennedy, only the second time since 1996 that Greenspan has published his research.
The ``froth'' in housing markets may now be spilling over into mortgage markets, Greenspan said. The abundance of interest only loans and the introduction of ``exotic'' variable-rate mortgages ``are developments that bear close scrutiny,'' he said.
Exotic Loans
Adjustable-rate mortgages now represent 29.8 percent of all applications, according to a weekly survey covering about half of all mortgages that is conducted by the Mortgage Bankers Association. Two years ago at the same time, adjustable-rate mortgages were 22.7 percent of the market.
Housing stocks erased gains after the Greenspan speech. The Standard & Poor's Supercomposite Homebuilding Index of 15 companies was up 0.1 percent at 2:39 p.m. after rising as much as 1.9 percent after today's housing report.
The Fed chairman concluded that a fourth to a third of home equity cashed out by households is being used to finance consumer spending, the biggest driver of U.S. economic growth. Another 25 percent goes to repay credit card debt for goods and services already purchased.
Consumer Spending
``The implied increase over the past decade in consumption expenditures financed by home equity extraction, rather than by income and other assets, would account for much of the decline in the personal savings rate since 1995,'' Greenspan noted.
Greenspan said if home purchases or refinancing declined, consumption would probably retrench, and the savings rate would rise. This would also point to larger adjustments in the U.S. economy, he noted. Greenspan said there is also a risk to institutions specializing in interest-only and other non- traditional forms of home loans.
``Imports of consumer goods would surely decline as would those imported intermediate products that support them,'' he said. ``And one would assume that the U.S. trade and current- account deficits would shrink as well, all else being equal.''
How ``disruptive'' such developments would be is ``an open question,'' he said.
Greenspan last co-authored a Federal Reserve in 1996. The title: ``Motor Vehicle Stocks, Scrappage, and Sales.''
Greenspan, 79, has been chairman of the Fed Board for 18 years. His non-renewable term as a governor expires in January. The White House hasn't named a successor, or nominated candidates to fill vacancies for two Board governors. Last Updated: September 26, 2005 14:41 EDT
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