Congress Quizzes Greenspan on Housing Market
MELISSA BLOCK, host:
On Capitol Hill today, Federal Reserve Chairman Alan Greenspan gave a mostly upbeat assessment of the economy, but he did repeat his concerns about the rapid rise in housing prices in some areas of the country. His comments came in testimony on the state of the economy before Congress' Joint Economic Committee. NPR's John Ydstie reports.
JOHN YDSTIE reporting:
Chairman Greenspan told lawmakers despite a recent soft patch, the US economy now seems to be on reasonably firm footing. But he also discussed some areas of concern; among them, the double-digit rise in home prices in recent years in several areas of the country. Some economists have suggested that's producing a housing bubble similar to the stock market bubble that led to big losses for investors around the country when it burst. Greenspan doesn't envision that scenario in housing, but, still, he expressed concerns.
Mr. ALAN GREENSPAN (Federal Reserve Chair): Although a bubble in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.
YDSTIE: The chairman didn't say where in the country housing prices might be getting dangerously high. However, analysts point most often to areas like New York City, southern Florida and California. Greenspan said even if price declines do occur in some local markets, he doesn't think there would be much impact on the national economy. He did say the froth in some housing markets appeared to be spilling over into the mortgage market with the growing popularity of exotic adjustable-rate and interest-only mortgages.
Mr. GREENSPAN: To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.
YDSTIE: Greenspan said that surprisingly low mortgage rates are helping to fuel the surge in home prices. Most analysts had expected that long-term interest rates, including mortgage rates, would head higher when the Fed began steadily raising short-term rates a year ago, but they haven't. And mortgage rates fell again today and stand at a 14-month low. In fact, around the world long-term interest rates have remained very low. In past testimony Greenspan called the phenomenon a `conundrum.' Today he offered some possible explanations. One is the effect of globalization; it has brought millions of low-cost, educated workers from China, India and the former Soviet republics into the global economy.
Mr. GREENSPAN: There are vast numbers of people who are skilled, educated and very significant interest in working hard, and they've all come on the market at the same time.
YDSTIE: That pool of cheap labor may have reduced the cost structure of global businesses so much that investors now see little danger of inflationary price hikes, so they've bid long-term interest rates lower. In the past, falling long-term rates have often signaled looming economic problems and an eventual slowdown in growth, but Greenspan said he doesn't think that's the case this time, partly because rates were already falling in 2004 when the world economy experienced its best growth in recent memory. John Ydstie, NPR News, Washington.