September 27, 2005 in Business

Greenspan: Homeowners in good shape

Associated Press
 
Associated Press photo

World Bank Group President Paul Wolfowitz, left, and U.S. Federal Reserve Chairman Alan Greenspan.
(Full-size photo)

WASHINGTON — While the high-flying housing market still holds risks, especially for the financially stretched, most homeowners are in a fairly good position to weather a shock if prices drop, Federal Reserve Chairman Alan Greenspan said Monday.

“The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices,” he said in remarks delivered via satellite to a banking conference in Palm Desert, Calif. Less than 5 percent of home borrowers were highly leveraged, according to one measure, he said.

Still, Greenspan, who has repeatedly warned about the potential perils if the housing market were to suddenly go south, also made clear that there are several factors — risky mortgages and speculative activity in particular — that warrant close scrutiny.

The quicker turnover of second homes — such as for investment or vacation purposes — appears to be feeding the surge in house prices, Greenspan said.

“Speculative activity may have had a greater role in generating the recent price increases than it customarily had had in the past,” he said.

Greenspan’s latest thoughts on the housing market came after the National Association of Realtors reported that sales of previously owned homes in August posted their second-highest level on record. Home prices, meanwhile, increased by the largest amount in 26 years.

Sales rose 2 percent in August to a seasonally adjusted annual rate of 7.29 million units; that was second only to the all-time high pace of 7.35 million units in June.

Low mortgage rates have been powering home sales, which hit record highs four years in a row and are expected to set a new record this year.

Median house prices climbed to a record of $220,000 in August, a gain of 15.8 percent from the same month a year ago. That was the biggest 12-month increase since July 1979.

Sales were up in all regions of the country except for the South, where they dipped. Because Hurricane Katrina hit in late August, its full brunt was not completely captured in the August sales figures, the association said.

Although his speech was devoted almost totally to the housing market, Greenspan did briefly mention that the Fed will be keeping a close eye on the aftermath of hurricanes Katrina and Rita.

“In the weeks and months ahead, the Federal Reserve will continue to closely follow the consequences of the recent devastating events in the Gulf Coast region in order to assess their implications for our economy,” he said.

Citing a research paper he co-wrote, Greenspan said the run-up in house prices has left households with a substantial pool of available home equity. Four-fifths of the increase in home-mortgage debt has come from people taking cash out of their appreciated homes through refinancings, home-equity loans and other things, he said.

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