Greenspan Calls a Housing Bottom (Again)

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"If they are too big to fail, make them smaller," former Nixon Treasury Secretary George Shultz said.

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That quote was pulled from a long article about none other than former FOMC chair Alan Greenspan. And we agree with Sec’y Schultz — and disagree with nearly everything Greenspan claims in the article. 

Ubiq-cerpt:™

"Alan Greenspan usually surrounds his opinions with caveats and convoluted clauses. But ask his view of the government’s response to problems confronting mortgage giants Fannie Mae and Freddie Mac, and he offers one word: "Bad."

In a conversation this week, the former Federal Reserve chairman also said he expects that U.S. house prices, a key factor in the outlook for the economy and financial markets, will begin to stabilize in the first half of next year.

Recall Greenspan’s first Real Estate bottom calling attempt came in late 2006 "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. I don’t know, but I think the worst of this may well be over." (Greenspan Says `Worst’ May Be Past in U.S. Housing)

He repeated the calls many times since then. Most recently, in April 2008, when he said "the drop in U.S. home prices will probably end well before’ early next year as the number of houses on the market diminishes, aiding an economic rebound."

Wow, that’s three strike in just one swing:  Inventory remains high, home prices continue to fall, and we are still waiting for the economic rebound.

Now, Greenie is pushing back his bottom call into 2009:

"Home prices in the U.S. are likely to start to
stabilize or touch bottom sometime in the first half of 2009," he said
in an interview. Tracing a jagged curve with his finger on a tabletop
to underscore the difficulty in pinpointing the precise trough, he
cautioned that even at a bottom, "prices could continue to drift lower
through 2009 and beyond."

Why this bottom call should be any better than the prior ones is anyone’s guess. Perhaps its because of longstanding scholarship in this field of study:

"A long-time student of housing markets, Mr. Greenspan now works out of a well-windowed, oval-shaped office that is evidence of his fascination with the housing market. His desk, couch, coffee table and conference table are strewn with print-outs of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.

An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said.

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. We won’t really know the market value of the asset side of the banking system’s balance sheet — and hence banks’ capital — until then."

Wessel slid in an interesting aside into the interview about Easy Al:  "At 82 years old, Mr. Greenspan remains sharp and his fascination with the workings of the economy undiminished. But his star no longer shines as brightly as it did when he retired from the Fed in January 2006."

He was being kind. Many of today’s current woes are traceable right back to Greenie: Keeping interest rates too low too long is just the start; his malfeasance in refusing to regulate the lending industry. — Wessel politely called it "regulating too lightly" but thats horseshit — Greenspan made the ideological decision to allow the free markets to just sort it all out. That’s whats happening now, and no one likes it very much (except a few hard core free market types, who find it all delightfully anarchic)

"Mr. Greenspan’s housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" — roughly 800,000 units above normal — diminishing soon. The other is a comparison of the current price of houses — he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas — with the government’s estimate of what it costs to rent a single-family house. As other economists do, Mr. Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door.

"It’s the imbalance of supply and demand which causes prices to go down, but it’s ultimately the valuation process of the use of the commodity…which tells you where the bottom is," Mr. Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It’ll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level."

The collapse in home prices, of course, is a major threat to the stability of Fannie and Freddie. At the Fed, Mr. Greenspan warned for years that the two mortgage giants’ business model threatened the nation’s financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt "inevitable," he said. "There’s no credible argument for bailing out Bear Stearns and not the GSEs."

Easy Al didn’t go oh fer the entire interview — he did get one thing right about Fraudy and Phoney:

"They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted — with necessary taxpayer support to make them financially viable — as five or 10 individual privately held units," which the government would eventually auction off to private investors, he said.

Hey! Me & Al agree about one thing! Go figure . . .

Previously:
Is the Housing Bust Over? (December 2006)
http://bigpicture.typepad.com/comments/2006/12/is_the_housing_.html

Free Lunch: Myths of the Greenspan Era (January 2006) 
http://bigpicture.typepad.com/comments/2006/01/free_lunch_myth.html

Greenspan on Housing Bottoms (April 2008) 
http://bigpicture.typepad.com/comments/2008/04/greenspan-on-ho.html

Greenspan ‘Reputation Tarnishment’ Tour Continues   (April 2008) 
http://bigpicture.typepad.com/comments/2008/04/greenspan-reput.html   

Sources:
Greenspan Sees Bottom In Housing, Criticizes Bailout
DAVID WESSEL
WSJ, August 14, 2008
http://online.wsj.com/article/SB121865515167837815.html

Greenspan Excerpts: Housing Stabilization Key to Crisis End
Real Time Economics,  August 13, 2008, 5:30 pm   
http://blogs.wsj.com/economics/2008/08/13/greenspan-excerpts-housing-stabilization-key-to-crisis-end/

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What's been said:

Discussions found on the web:
  1. TheGuru commented on Aug 13

    Alan Greenspan is a morally bankrupt 82 year soft in the head old coot. The world will be a better place when he stops speaking and people stop listening to ol’ Mr. Magoo. Mediocre economist at best.

  2. algernon commented on Aug 13

    Barry, I agree with you & weasely Al on the proper solution to Fanny & Freddie.

    But your comments slighting believers in free markets isn’t fair. Lenders responded to perverse incentives put in place by central bankers…not just our Fed but also Asian & petrostate central banks depressing long-term rates. There is nothing free market about central banks lending out freshly created money.

    ~~~

    BR: One of the regulatory roles of central banks is to insure the health of the lending industry. Greenspan was warned by fellow Fed Governors that lenders were making imprudent loans that would have deep ramifications when they defaulted.

    Allowing irresponsible loans for VERY short term gains at the expense of the long term health of the financial system and economy is simply ideological foolishness.

    If any regulatory area reflects the truth that “An ounce of prevention is worth a pound of cure,” its this one.

  3. Renterfornow commented on Aug 13

    Hey Greenscammer you were the Number one money and credit dealer in history. This clown was the worse ever.
    Remember this smart guy telling homedebtors to take out arm loans at the bottom of interest rate cycle? This serial money printer could not see there was a credit and housing bubble of epic proportions?
    I could everytime I went to look at an overpriced shack being offered from some greedy homedebtor or flipper fool.

  4. Ecklebob commented on Aug 13

    Barry, GREAT POST!

  5. James commented on Aug 13

    Greenspan should not be allowed to appear in public. The markets are volatile enough without him running his mouth. Anyway he created this problem by keeping rates so low for so long. I’d like to see him debate Jim Rogers on the effects of his monetary policy. Check out our blog–we have interviewed Jim Rogers twice and many others. http://www.stockshotz.tv or http://www.stockshotz.blogspot.com

  6. Steve Barry commented on Aug 13

    Greenspan said he knew Iraq was all about oil…but he said nothing at the time, in fact he funded it by the printing money. He only told the truth after getting an $8 Million book advance. And yes…he could not tell that this was a little out of hand.

    He has supplanted Jimmy Carter as this country’s greatest monster.

  7. Greg0658 commented on Aug 13

    Banker Al – “make them financially viable — as five or 10 individual privately held units”

    $5Tril into 10 subdivided units = $500Bil
    sold off at auction for the bargain basement price of $500Mil each

    Big Banks recap at $5Bil
    Shareholders & Taxpayers loose $4.95Tril

    Now thats how you do IT.
    GO Figure the bonus on them deals?

  8. TDL commented on Aug 13

    “Mediocre economist at best”, that’s still being way too kind. There is a reason he went into government work…

    To paraphrase Jim Rogers, this mess was the result of regulated banking. In free market, not a “Free Market” (i.e. Republican rhetoric & neo-mercantalist policy), most of these business models would have failed and the losses would have been smaller. Instead, in the regulated banking world we got relentless bailouts and the most well connected banks getting ever larger (and using their size as an excuse for more bailouts.)

    Regards,
    TDL

  9. Jeff commented on Aug 13

    One of these days he’ll be right, victory will be declared, and his genius restored by the MSM with full victory parade with candy and flowers.

    His babblings are reminiscent of a slipping Reagan middle to late in his second term. By then, Nancy was running the country based on her astrology charts.

  10. VJ commented on Aug 14

    One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that ‘excess supply’ — roughly 800,000 units above normal — diminishing soon.

    By what possible manner ?

  11. m3 commented on Aug 14

    exactly.

    1) it’s still cheaper to rent in most places
    2) no one wants to buy while home prices fall (and perversely, people ONLY want to buy as prices rise)
    3) prices will continue to fall as mortgage rates continue go up (home prices are inversely related to mortgage rates)
    4) most of those new homes are way out in the boonies, which are undesirable due to gas prices.
    5) people are losing jobs/income due to recession
    6) even if they have a job, the bank won’t lend them money (assuming the bank doesn’t go under)
    7) even if someone does have a job and a willing lender, the buyer will lowball the seller, depressing prices further

    and i haven’t even gotten to fran and fred yet.

  12. Eric commented on Aug 14

    I still have the occasional nightmare caused by the mental image of Alan Greenspan and Barbara Walters getting together.

  13. Tom Lindmark commented on Aug 14

    Well, we are well on our way to solving this problem with housing. We have found the villain and can now demonize him and move on. Wish it were that easy.

    Concentrate on the article, he had a couple of good things to say. Break up Fannie and Freddie and look to immigrants for household formation. As far as I could see in my reading he didn’t try and defend anything he did.

    Let’s keep a couple things in mind. First, he did try and bring Fan and Fred down and was beaten down by Congress-mostly but not exclusively by the Democratic side of the aisle. Second, no single person or institution (the Fed) caused this mess. There is a whole lot of blame to go around. Those that are dissing the most might well be engaging in some blogosphere ass covering.

  14. Andrew Mackenzie commented on Aug 14

    I’m going to have to throw in with algernon, TDL, and the hardcore free market types. After decades of central banking and government idiocy, (or am I repeating myself?) this isn’t a crisis that can be blamed on the free market.

    Granted, if an market were to be deregulated too quickly, there could be terrible consequences. It would drop off a cliff. But gradual deregulation of lending markets should be the goal. Start by ending the fed’s interest rate manipulation.

    The fed’s issue isn’t its management. The very concept that the market can be manipulated to end the business cycle is trash. It all devolves into an attempt to make the numbers on wall street look nice while the middle class disappears.

  15. Ritchie commented on Aug 14

    algernon: “There is nothing free market about central banks lending out freshly created money.”

    Should the free market set up an organization, say, like a kind of mini-government, to regulate/control the central banks so they don’t print money?

  16. jf commented on Aug 14

    I know someone who works at a Fed branch doing research, and I’ve been arguing with him for years about the type of lending going on and what the Fed ought to be doing to regulate that. His stock answer: not really the Fed’s responsiblilty.

    What gets me about Greenspan is his supposed scholarship. He is revered for his long-view common sense gleaned from pouring over a rich treasury of data available to those in his department. Only, debacle after debacle show up to challenge his big picture assumptions based on this data. LTCM, while not of is making, one can imagine the principals being called into his office for a chewing out only to throw reams of paper in the Chairman’s face and receiving an apology. I don’t know if it was his interaction with these people that knocked him into the rut of technical analysis, but he seems to not know anything else but the wisdom of the market. The collective wisdom of market participants means market prices are always right.

    To a certain extent, of course technical analysis has a huge role to play in understanding the market. But I think Greenspan tries to reverse engineer the technical into component fundamental data by listening to various voices such as his own researchers at the Fed, NAR analysts, automobile manufacturers, commercial bankers, and the voters, to name a few. All of these interests will put forth arguments in order to sway opinion regardless of how their respective constituents have hedged their positions in the market. Meanwhile, he simply doubles down again and again until he realizes it all it fits much better if he simply expands his world view to a new reality totally not of his own making.

  17. Jason commented on Aug 14

    Logic fail…if “he cautioned that even at a bottom, “prices could continue to drift lower through 2009 and beyond.”” is that actually a bottom?

    ’cause, the way I understood it (and I just passed high school econ), when things stop going up, that’s what’s called a “top”, and when things stop going down, that’s a bottom.

    But then, I don’t have a PhD in Econ…

  18. VJ commented on Aug 14

    Now that I think about it, you could eliminate the “excess supply” by burning down 800,000 houses, which would likely finally create a bottom to the market, but of course then the federal government would have to bail out the insurance industry.
    .

  19. leftback commented on Aug 14

    VJ: from “demand destruction” to “subdivision destruction”..?

    …don’t laugh – I think this is almost certain to happen. We will see widespread destruction of housing units – by fire, vandalism and local authority edict, probably using some kind of public safety issue as an excuse (Remember – local politics is corrupt and dominated by… the RE Industry !!)

    Barry – I propose we designate Greenspan as Officially Irrelevant. Just like Larry Kudlow, because neither of them can espouse macroeconomic views that make sense – they are being paid to make happy talk.

  20. Jim Haygood commented on Aug 14

    Greenspan’s “housing bottom” calls are only his most recent screw-ups. Let’s roll the clock back to 23 Feb 2004:

    ————

    WASHINGTON — Federal Reserve Chairman Alan Greenspan said Monday that … a Fed study suggested many homeowners could have saved tens of thousands of dollars in the last decade if they had ARMs.

    In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.

    “Overall, the household sector seems to be in good shape,” Greenspan said.

    http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm

    ————

    The preposterous, mumbling flake Greenspan was not merely wrong; he was spectacularly, power-dive-in-flames wrong.

    Take out an ARM when Fed Funds are at a record-low one percent? You don’t need a PhD Econ to figure out that Magoo was a shill for the mortgage securitization industry.

    Greenspan should be publicly stoned, as the angry peasants cry “DEATH TO THE FED!”

  21. mw commented on Aug 14

    We are hearing these “Bottom Heads” call a “Bottom” and have to think.. can they not do simple math?.. If we have written off only 500B so far and many top financial experts are saying ONE TRILLION to TWO TRILLION needs to go, then my friends how can we be at a “Bottom”?

  22. Steve in Fly-over Land commented on Aug 14

    “It’s the imbalance of supply and demand which causes prices to go down, but it’s ultimately the valuation process of the use of the commodity…which tells you where the bottom is,”

    What an absurd statement. Just as people keep buying because prices are going up, far beyond any reasonable valuation, they keep refusing to buy because prices are going down. Market psycology determines the bottim and it’s only clear in retrospect. All the price/rent ratio is telling us now is that prices are still too high. It gives us no clue where the bottom will be.

  23. Constantnormal commented on Aug 14

    While physical destruction of a few hundred thousand unsalable homes would make for a spirited recovery in the housing markets (after the ongoing foreclosure tsunami winds down), it is not a necessary event to mark a bottom in housing. All that needs to happen to mark a housing bottom is for people to stop being forced out of their homes.

    That said, I am expecting for some owner of an out-sized inventory of homes to find some creative way to dispose of them. Perhaps sell a large housing development to a company looking for land to site a solar power facility or a reservoir, at a thousand bucks per house (paid for by a government grant/subsidy), and the seller taking payment in something like convertible stock in the new company, or a zero-coupon convertible debt issue. That seems smarmy enough.

    Or maybe a lottery, selling hundred-dollar tickets for chances to “win” a (once-upon-a-time) six-figure home. All you need is enough suckers who have a hundred bucks and no home (should be plenty of those by now), something like a 3000:1 ratio of ticket sales to homes should do the trick.

    Of course the would be a huge writedown by the seller, but it would hardly be noticed amid the current blizzard of mortgage-related writedowns.

  24. Todd commented on Aug 14

    Here in Miami, I am trying to figure out just how the housing market will bottom out. There was huge overbuilding on the Biscayne Boulevard corridor, where speculators bought the promise that those presently bereft neighborhoods would gentrify very suddenly attracting trendy restaurants, shops, cafes and bars. That hope is being pushed back at least 3-5 years before any small business would dare to open in neighborhoods where the streets are mostly ghost towns during the day and total ghost towns at night. Only someone willing to accept dead money for years will take that on.

    In the interim, all over Miami you have many buildings where foreclosed apartments are not paying their maintenance. Buildings can’t put liens on the properties to receive all back-owed maintenance because they are limited to just 1% of the eventual sales price of the apartment, so many apartment owners are just left holding the bag on having to pay other people’s maintenance charges. I hear stories of buildings where garbage isn’t picked up, where the water has been turned off. I thought about maybe trying to bottomfish on Miami Beach which will eventually rebound but I decided it’s just too risky. How can you buy an apartment when you have no idea how many apartments in the building aren’t paying their maintenance, and how many apartments are owned by highly distressed owners who in the future may not pay their maintenance? You can’t even make a decision based upon prospective cash flow because of that. I imagine this isn’t a situation unique to Miami. Just how does the condo market rebound under these circumstances without a substantial passing of time? 2-3 years is not sufficient.

  25. Greg0658 commented on Aug 14

    I slept on my Greg0658 | Aug 13, 2008 10:58:07 PM breakdown ie:
    Al – “make them financially viable — as five or 10 individual privately held units”$5Tril into 10 subdivided units = $500Bil
    sold off at auction for the bargain basement price of $500Mil each
    Big Banks recap at $5Bil
    Shareholders & Taxpayers loose $4.95Tril

    If that is the best fix the maestro has … well … the boys in the mines, factories, and house frames already got their hands on some of that $4.95 Tril once … if it has to go back to the 17 big banks to start this process over and go on our merry way … I guess so be it … some folks are built for air conditioned offices and some are built for the field

  26. dave c. commented on Aug 14

    If Greenspan had not existed he would have had to be invented. His “genius”, like Bill Clinton’s, was strictly a lamestream media creation. He served the purposes of the politicians and investment community of his time by letting the good times roll with easy money. He made a lot of people rich at the expense of the rest of us, and then got his also. dc.

  27. The Big Picture commented on Aug 14

    Greenspan’s Housing Bottom: Agree or Disagree?

    Last night, we looked at yet another Greenspan housing bottom call. This morning, the WSJ forum asked the following question: Do you agree with Alan Greenspan’s forecast for house prices to stabilize in the first half of 2009? Here are the results: Abo…

  28. Steve Barry commented on Aug 14

    Anybody ever think Greenspan was NOT a screw-up? That everything he did achieved his exact goals? Certainly he became known as the “Maestro” to public and media adoration…and banked the huge book advance. He survived under 4 different presidents by blowing his bubbles. The rich are richer and the poor may be on bread lines soon. Is it so crazy that this was his plan all along?

    I’m done posting ever again on this matter…time to clean up the mess.

  29. Greg0658 commented on Aug 14

    having just planted fall lettuce & spinach
    and if these blog words matter some day “I guess so be it” … ummm I really meant “want a good fix for eternity” or at least my lifetime :-)

  30. Michael LittleBig commented on Aug 14

    With all due respect to Alan Greenspan so the housing market bottoms out. So what?
    The analogy here is that the economic house is on fire, the house burns to the ground and all that is left is an unstable foundation. Who is going to solve the economic mess? Are the people that put our economy is this crisis going to now say they have the answer. I don’t think so. America,we have a real problem. This is the second time in less than 2 decades. We as a people better get the message.
    We need to change the way Congess does business, we need to change the people who
    are doing the Congress business.Enough is enough. This is what term limits do. We need to mandate one term. That way they can only steal a smaller portion.
    MLB

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