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The Housing Bubble
Greenspan Says Personal Debt Is Mitigated by Housing Value
The Associated Press
The New York Times, Feb.24, 2004
This article reports on a speech in which Federal Reserve Board Chairman Alan Greenspan
reportedly told his audience that current levels of household debt should not be a concern,
because households own more than $14 trillion in real estate.
It is worth noting that there has been an extraordinary run-up in real estate prices in the last eight years,
with the rise in home prices exceede
the overall rate of inflation by more than 35 percentage points.
The United States has never before experienced such a run-up in home prices.
In the past, home prices have generally kept pace w
ith
the overall the rate of inflation.
The recent run-up in home prices, which coincid
ed with the stock bubble, is very similar to the pattern in Japan in the '80s,
which also experienced simultaneous bubbles in its real estate and stock markets.
The possibility that home prices are being driven by a speculative bubble should provide serious grounds for concern.
The ratio of equity to value is at a record low 53.5 percent.
This compares to ratios of close to 67 percent in the '70s and '80s.
With much of the baby boom cohort nearing retirement,
it would be expected that the ratio of equity to value would be unusually high at present,
as many families should be near paying off their mortgages.
Also, the bubble should raise the ratio of equ
ity to value,
since any appreciation in home prices translates directly into higher equity.
If the housing bubble were to burst,
and the appreciation of home prices in excess of the
overall rat
e of inflation were eliminated,
the ratio of equity to value would be less than 40 percent.
It is worth noting t
hat Mr. Greenspan never clearly identified the stock bubble in his public remarks prior to its collapse.
Even as the market was reaching record price to earnings ratios in 1999 and 2000,
Mr. Greenspan was telling investors that such prices might be justified if the recent acceleration in productivity growth were to continue.
The Housing Bubble
Greenspan Says Personal Debt Is Mitigated by Housing Value
The Associated Press
The New York Times, Feb.24, 2004
This article reports on a speech in which Federal Reserve Board Chairman Alan Greenspan
reportedly told his audience that current levels of household debt should not be a concern,
because households own more than $14 trillion in real estate.
It is worth noting that there has been an extraordinary run-up in real estate prices in the last eight years,
with the rise in home prices exceede
the overall rate of inflation by more than 35 percentage points.
The United States has never before experienced such a run-up in home prices.
In the past, home prices have generally kept pace w
ith
the overall the rate of inflation.
The recent run-up in home prices, which coincid
ed with the stock bubble, is very similar to the pattern in Japan in the '80s,
which also experienced simultaneous bubbles in its real estate and stock markets.
The possibility that home prices are being driven by a speculative bubble should provide serious grounds for concern.
The ratio of equity to value is at a record low 53.5 percent.
This compares to ratios of close to 67 percent in the '70s and '80s.
With much of the baby boom cohort nearing retirement,
it would be expected that the ratio of equity to value would be unusually high at present,
as many families should be near paying off their mortgages.
Also, the bubble should raise the ratio of equ
ity to value,
since any appreciation in home prices translates directly into higher equity.
If the housing bubble were to burst,
and the appreciation of home prices in excess of the
overall rat
e of inflation were eliminated,
the ratio of equity to value would be less than 40 percent.
It is worth noting t
hat Mr. Greenspan never clearly identified the stock bubble in his public remarks prior to its collapse.
Even as the market was reaching record price to earnings ratios in 1999 and 2000,
Mr. Greenspan was telling investors that such prices might be justified if the recent acceleration in productivity growth were to continue.