Greenspan: End of housing boom inevitable

[Stunt]

I wonder what they mean by the bolded, do you think the fed should be mopping up the messes created by the masses or guide them in their decisions?

Do you think there is a housing bubble and to what extent will this have an effect on the economy as a whole?

Greenspan: end of housing boom inevitable
Sun Aug 28, 2005 1:44 AM ET

By Glenn Somerville

JACKSON HOLE, Wyo. (Reuters) - U.S. home prices could fall as the housing surge "inevitably" slows, Federal Reserve Chairman Alan Greenspan said on Saturday as he cast doubt on central banks' ability to sway such asset values.

"The housing boom will inevitably simmer down," the Fed chief said. "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 latest house price warning came during concluding remarks to an annual Kansas City Fed symposium -- his last as Fed chief and one focused on a retrospective of his 18 years at the Fed. Greenspan intends to step down at the end of next January.

The central banker famed for Delphic utterances offered an unusually blunt assessment of the challenges he sees facing his still-unknown heir and his views of issues such as inflation targets, economic imbalances and the budget gap.

On Friday, he warned investors not to assume rises in the value of assets such as stocks and homes were "structural and permanent" and that the buying power fueled by those price surges could evaporate if buyers turned wary.

Analysts called Greenspan's warnings timely but said he was not signaling an imminent collapse, just pointing out that double-digit house price gains could not last forever.

"I would say it was a very explicit forecast of what's going to happen not over one year, but over two or three years, said David Hale, chairman of Chicago-based Hale Advisors.

Some economists have criticized Greenspan for letting what they view as a house price "bubble" develop, equating it to the one that swept technology stocks to stratospheric levels before bursting in 2000.

But Greenspan argues the Fed's role is to mop up after bubbles burst, since they are hard to spot and deflate safely.

On Saturday, he said that while he expected continued debate over whether the Fed could and should use its power over short-term interest rates to try to influence asset prices, he did not see that as feasible.

"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," he said.

"But given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon."

He did not rule out the possibility that better understanding of asset price behavior could one day affect the conduct of monetary policy.

Nationwide, home prices are up more than 50 percent over the past five years, a boom stoked by long-term interest rates that have stayed cheap despite 10 straight short-term rate rises by the Fed since June 2004.

BENEFITS FOR BROADER ECONOMY

Although it would slow consumer spending, Greenspan said a cooling in housing could help balance the broad economy.

"The surprisingly high correlation between increases in home equity extraction and the current account deficit suggests that an end to the housing boom could induce a significant rise in the personal savings rate, a decline in imports and a corresponding improvement in the current account deficit," the Fed chief said.

Greenspan said how much pain those changes cause depends on whether the United States and key trade partners keep their policies flexible to allow needed adjustments.

The large gap in the U.S. current account, the broadest trade measure since it includes investment flows, has worried many U.S. lawmakers. Greenspan warned anew this weekend that trade protectionism, including tariffs and other bars to the global flow of goods, was a threat to world economic stability.

In what could be seen as a parting shot at those who want the Fed to adopt openly stated inflation targets, as have many of the world's big central banks, Greenspan reiterated his steadfast opposition.

He said the Fed had until now avoided targets out of concern they could hinder achievement of its core goal: maximum sustainable economic growth underpinned by price stability.

"I remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes behavior among the world's central banks," he said.

"That said, I am certain this will remain a topic of lively discussion here and at other monetary forums in years to come."

While the White House has not chosen a successor to the 79-year-old Fed chief, at least one of those deemed a potential candidate -- former Fed board governor and current Bush administration economic adviser Ben Bernanke -- is a staunch proponent of inflation targets.

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[1EZduzit]

I think there is defintley a housing bubble in many places of the US caused by low interest rates and a lack of confidence in the stock market.

The effect could be HUGE, because it's not just housing, it's ALL real estate.

 

[Engineer]

Originally posted by: 1EZduzit
I think there is defintley a housing bubble in many places of the US caused by low interest rates and a lack of confidence in the stock market.

The effect could be HUGE, because it's not just housing, it's ALL real estate.

I read a Yahoo article a few weeks ago that mentioned that many professionals (and non professionals for that matter) had money tied up in real estate in leau of stocks/mutual funds. The stock market (in general) has been mostly flat since 2001. Maybe a burst in the housing bubble (or even a slight rupture) will move money away from the housing market and move toward the general stock market. With P/E ratios back under historical averages (20 is desirable), it's time to move the market forward!

 

[OS]

Originally posted by: Engineer

Originally posted by: 1EZduzit
I think there is defintley a housing bubble in many places of the US caused by low interest rates and a lack of confidence in the stock market.

The effect could be HUGE, because it's not just housing, it's ALL real estate.

I read a Yahoo article a few weeks ago that mentioned that many professionals (and non professionals for that matter) had money tied up in real estate in leau of stocks/mutual funds. The stock market (in general) has been mostly flat since 2001. Maybe a burst in the housing bubble (or even a slight rupture) will move money away from the housing market and move toward the general stock market. With P/E ratios back under historical averages (20 is desirable), it's time to move the market forward!

I always thought that historical P/E for stocks was actually below 15. P/E of 20 is equivalnet to 5% annual return, which is not much better than an internet savings account especially when you consider the risk premium for stocks. As I understand it, stocks are still a neutral to relatively poor value on a historical basis.

 

[Engineer]

Originally posted by: OS

Originally posted by: Engineer

Originally posted by: 1EZduzit
I think there is defintley a housing bubble in many places of the US caused by low interest rates and a lack of confidence in the stock market.

The effect could be HUGE, because it's not just housing, it's ALL real estate.

I read a Yahoo article a few weeks ago that mentioned that many professionals (and non professionals for that matter) had money tied up in real estate in leau of stocks/mutual funds. The stock market (in general) has been mostly flat since 2001. Maybe a burst in the housing bubble (or even a slight rupture) will move money away from the housing market and move toward the general stock market. With P/E ratios back under historical averages (20 is desirable), it's time to move the market forward!

I always thought that historical P/E for stocks was actually below 15. P/E of 20 is equivalnet to 5% annual return, which is not much better than an internet savings account especially when you consider the risk premium for stocks. As I understand it, stocks are still a neutral to relatively poor value on a historical basis.

You might be right on that one. The late 90's, in which PE ratios were outrageous, were mentioned 20 PE ratio many times. I guess that I followed it too much then (CNBC watcher). Maybe 15 is more reasonable.

Regardless of PE ratio, if earnings grow at faster than a 5% pace, then the PE ratio could adjust in the same manner. (i.e. Growth could be 15% for company and the PE ratio could remain at year over year at 20 because the stock price reflected grows 15% accordingly). If PE ratio's are coming down (as they are), it means:

1. Stock prices coming down (but they're more flat to slightly up for the last few years)
2. Earnings are up.