High Interest In Greenspan’s Remarks From Home Builders Group Hears Talk On Rates

Alan Greenspan knew he would be playing to a tough audience.

So when the Federal Reserve Board chairman spoke Saturday to members of the industry that has been hardest hit by his agency’s recent interest rate increases, he made no apologies.

Instead, he promised home builders that they will profit over the long haul from the short-term economic pain caused by higher interest rates.

“Some have criticized these rate hikes, but I am convinced that if we had not acted, your business would have suffered,” Greenspan told the National Association of Home Builders. “Absent the (interest rate) tightening, mortgage rates today may have been much higher than they actually are.”

Since early last year, the Federal Reserve’s actions have increased long-term home loan rates by more than two percentage points. Experts believe the increases will cut home building by more than 100,000 homes this year as some potential buyers are priced out of the market because of higher finance costs.

In keeping with Fed policy, Greenspan would not predict what further actions the agency might take to raise rates.

However, he told the builders that the Federal Reserve did not yet know whether its interest rate increases would prove effective in slowing an economy that he said had been overheated.

Home builders, who have watched their sales decline in recent months, have been the harshest critics of the Federal Reserve’s efforts to hold down inflation through higher interest rates.

“We think the Fed has tightened enough,” said Tommy Thompson, president of the National Association of Home Builders. “Just when this industry is positioned to be a strong engine of economic growth, he’s about to choke it.”

Even the typically somber Greenspan couldn’t overlook the irony of his address during a conference expected to attract 65,000 builders and suppliers.

“I’m violating a cardinal rule - only appear before home builders when your last interest rate move was down,” Greenspan said with his characteristic deadpan delivery.

Economists widely predict the agency will vote to raise interest costs when it meets Tuesday, which would be the seventh such increase in 12 months.

Greenspan said that if they were successful, the Federal Reserve’s attempts to slow the country’s economic growth and control inflation would build a more stable, sustainable market for housing.

“A boom-and-bust cycle is no friend to the home-building industry,” he said. “If your industry is to prosper, you need stability.”

Housing construction - which hit a 14-year high in 1994 - is benefiting from more flexible finance plans, increased income growth and stronger consumer confidence, Greenspan said.

“Confident consumers and 9 percent mortgage rates are better than nervous consumers at 7 percent rates,” he said. “They need to feel comfortable that they have the income to service their mortgage.”

Even with recent mortgage rate increases, home costs remain affordable by historic standards, Greenspan said.

“Typical home buyers today have to devote less of their incomes to mortgage payments than at practically any time during the past 20 years,” he said.

He downplayed the overall importance of low interest rates to housing construction and pointed to new studies showing higher-thanexpected home demand during the rest of the decade.

Many of the builders, who question whether the Federal Reserve will be able to restrain economic growth without smothering it, remained skeptical.

“I think the Fed’s objectives are honorable, but whether it turns out right remains to be seen,” said David Seiders, the home builders association’s chief economist. “It seems inevitable that some kind of a slowdown is in front of us.”