Greenspan: Housing market likely to cool
By Jeannine Aversa
Associated Press
WASHINGTON — Federal Reserve Chairman Alan Greenspan said yesterday that the high-flying housing market is likely to lose a bit of altitude this year. That could slow consumer spending, one of the economy's few bright spots, he cautioned.
A home-mortgage refinancing boom and rising home values have been key pillars supporting consumer spending, the main force keeping the economy going. Greenspan said an expected cooling on the refinancing and home appreciation fronts could turn homeowners into more cautious consumers.
"The frenetic pace of home equity extraction last year is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services," Greenspan said in a speech delivered via a satellite video link to the Independent Community Bankers of America meeting in Orlando, Fla.
Private economists largely agreed with Greenspan's assessment, saying that the super-brisk pace of refinancings and home-price appreciation seen in recent years probably will slow, which could restrain buying behavior.
Still, they also agreed with Greenspan's assessment that the housing market will remain healthy.
"Low mortgage rates still represent a stimulus to the housing market and there is still a population of people out there who are tempted to buy or refinance the home they own because of low mortgage rates," said Bill Cheney, chief economist at John Hancock.
"But in terms of growth rates — in home refinancing, home sales and home values — you can't look for a whole lot of increase," he added.
Decades-low mortgage rates stoked home sales and home mortgage refinancing to record highs last year. Given the stock market turbulence and the sagging economy, owning a home has become an especially attractive investment for consumers.
As consumers swap higher-interest rate home loans for lower-interest rate ones, the extra cash has helped to support consumer spending, one of few sources of strength for the economy.
Rising home values also have made homeowners feel better about their balance sheets during these muddled economic times, another factor that has supported consumer spending.
Greenspan noted that the brisk pace of home price increases is slowing and that refinancings are off their peak.
Even as home appreciation slows, the housing market is in fine shape, Greenspan said, adding that he is not overly worried about a dramatic or disruptive drop in housing prices.
"Clearly, after their very substantial run-up in recent years, home prices could recede," Greenspan said. "A sharp decline, the consequences of a bursting bubble, however, seems most unlikely."
While David Seiders, chief economist at the National Association of Home Builders, agreed with Greenspan that the economy wasn't in danger of a housing bubble break, he strongly disagreed with the possibility that home prices might actually fall in the near future.
"To toss in the specter of the possibility of falling home prices — at this stage of the game — is not something you want to say to the home-buying public right now," Seiders said. "It could create an unnecessary chill."
Greenspan did not discuss the future course of interest rate policy in either his prepared remarks or in a question-and-answer period after his speech. The Federal Reserve meets next on March 18 and analysts expect policy-makers will leave rates at a 41-year low of 1.25 percent.
Recent economic reports suggest that businesses and consumers are turning more cautious amid worries about a war with Iraq, the turbulent stock market and rising energy prices.
Freddie Mac reported last week that rates on 30-year mortgages dropped to a new low of 5.79 percent. Economists said home sales this year could turn out to be the second-strongest year ever.
And, Phil Colling, economist at the Mortgage Bankers Association of America, said there's a chance mortgage refinancing activity for 2003 could post the second-best year on record.
