Froth vs Bubble

Anyone looking for some clarity from Federal Reserve Chair Alan Greenspan on whether the United States Real Estate market is in a speculative bubble is probably asking the person least likely to provide a clear and understandable answer. 

Well, do we or don’t we?

Well, yes kinda, but not really, no.

That was Big Al’s answer to the question of whether we have a housing bubble in the U.S. or not.

"There are a few things that suggest, at a minimum, there’s a little froth in this market. We don’t perceive that there is a national bubble, but it’s hard not to see that there are a lot of local bubbles," Greenspan opined to the Economic Club of New York.

O.K., frothy, no national bubble; yet lots of smaller bubblettes. (Recall our prior bubblette discussion in February).

But don’t breathe to deeply just yet. Greenie noted that asset gains in Real Estate are unsustainable: 

"Without calling the overall national issue a bubble, it’s pretty clear that it’s an unsustainable underlying pattern. What we see are a number of forces, which are, as far as I can judge, not infinitely projectable."

Got that? Let’s review: Not a bubble, but Unsustainable. Not a national bubble, but local bubblettes.

Thanks for clarifying that for us . . .


UPDATE MAY 22,2005   6:36am

Alan Abelson had a few choice words on the Fed Chief’s prognostications here. He equates Friday’s speechifying to the infamous 1996  "irrational exuberance" speech. (So we got that going for us, which is nice).


Greenspan Calls Home-Price Speculation Unsustainable
Craig Torres, Alison Fitzgerald
Bloomberg, May 20, 2005 18:04 EDT

Greenspan sees no housing bubble
Federal Reserve chairman says sector shows sign of
‘froth’ but doesn’t perceive a national bubble.
Reuters, May 20, 2005: 3:08 PM EDT

A Bubble in the Housing Market? Any Implosion Won’t Be Obvious
Ken Brown
The Wall Street Journal, May 20, 2005,,SB111662227079239476,00.html

Greenspan Is Concerned About ‘Froth’ in Housing
NYTimes, May 21, 2005




Abelson on Greenspan on Housing Bubbles:

"IF YOU’RE WORRIED ABOUT THE HOUSING BUBBLE bursting — relax! Pay not the slightest mind to those envious know-nothings who are wailing that house prices today are where stock prices were in March 2000. We can absolutely guarantee that this once-in-a-lifetime boom has at least seven or eight more gloriously bubbly months to go.

So, we urge you, there’s not a moment to lose! Put down this magazine immediately! Run, don’t walk, to your friendly neighborhood real-estate broker and join the thousands of other shrewd investors madly scrambling to buy second, third or fourth houses.

Our confidence in the continuing boom in residential real estate — which admittedly is a complete reversal of our previous stance — springs not from any fresh epiphany about housing or a greater appreciation of its potential rewards. And we’re not temporarily in leave of our senses from the shock of having sold our present homestead for a vast fortune; we haven’t (maybe because we inhabit a cave, but, if we do say so ourselves, it’s a quite nice cave).

Rather, our view that the housing bubble is destined to stay intact and aloft and, indeed, if anything, may get bigger and go higher, is ground in our long, close and continuing study of Alan Greenspan and the often dramatic impact of his actions and utterances on markets.

Mr. Greenspan, of course, is not as versed in real estate as he is in equities. Nonetheless, of late he has been making up for lost time, offering observations on the state of that market and even a bit of casual advice to home buyers. On the latter score, for example, he indicated that adjustable rate mortgages were the way to go. The suggestion seemed a little strange, if only because it was proffered just when interest rates were about to go up. As a matter of fact, it seemed doubly strange in light of the fact that Mr. Greenspan was the conscious agent of their going up. But then, Mr. G acts and speaks in mysterious ways.

More recently, on more than one occasion he seized the opportunity to address the vexing issue of whether there is a housing bubble by saying not really, although there may be little bubbles — sort of bubblettes, we guess — here and there.

And last Friday, in a question-and-answer session following a speech on energy to the Economic Club of New York, he developed this theme more definitively. While expressing skepticism as to the existence of a national bubble, he allowed as "it’s hard not to see a lot of local bubbles."

What’s more, he took note of such undesirable elements as "speculation" and even, heavens to Betsy, "froth" sneaking into the housing market. (One of the few instances in which undesirable elements moving into the neighborhood raise, rather than lower, property values.)

And he also cautioned that housing prices couldn’t keep rising forever (an insight that electrified the audience, or at least that part of it that hadn’t succumbed to post-prandial slumber).

But in his usual becomingly becalming manner, Mr. Greenspan was quick to point out there was only a "little froth" in the housing market. And even were the unthinkable to happen, he observed reassuringly, only those unfortunates who purchase homes just before prices actually drop "are going to have problems." All the more reason, obviously, you’d better hurry and buy now before prices head south in a big way.

Divining meaning from the chairman’s verbal meanderings is always a chancy endeavor. But our sense is that he’s quite aware that there is a housing bubble; that it has the potential to do serious damage to the economy were it to go the way of the equity bubble in 2000; and that he feels obliged to keep it from popping on his watch. And he intends to do so through the standard Greenspan formula mixing caveat and denial.

His comments last Friday can thus be equated to his famous "irrational exuberance" pronunciamento on the stock market back in December 1996. As you doubtless remember, it took over three full years and many, many points before that bubble popped.

So why not a repeat performance? Why, in other words, shouldn’t the housing bubble also endure at least another three years? Why only eight months?

Simply because Mr. Greenspan in 1996 rightly anticipated he’d be around for many years. But come early in 2006, he’s gone.

So, as we say, if you’re hot to buy a house before prices hit the skids, you really don’t have all that much time."

Capitol Punishment
Up and Down Wall Street   
Alan Abelson
Barron’s Monday, May 23, 2005

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  1. alex norman commented on May 23

    The Fed is running scared as they see the Data flow coming over the transom.

    Greenspan knows that if HE fully acknowledges THE BIGGEST HOUSING BUBBLE in the history of the world that his very acknowlegement of it might burst it.

    But he knows things are getting bad–he knows the lending is out of control, that prices are unsustainable, that its impact on the economy will be worse the longer it inflates.

    So he tries to fudge. He did this before when telling the carry-traders that if they didn’t unwind soon they were “desirous of losing money.” Well the leveraged speculators in the Bond market heard Al’s bark and yawned. They know he’s not going to do anything rash. He’s MEASURED.

    In this instance, he is once-again trying to instill enough fear into the market to make people stop doing irresponsible things with all the free money he has given them. And once again, they will hear his bark and realize he won’t bite.

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