Las Vegas Sun

March 28, 2024

Greenspan housing view seen as hazardous by Wall Street

Federal Reserve Chairman Alan Greenspan isn't worried about the hot U.S. housing market so he isn't cooling it off by raising interest rates faster.

Worry, say Wall Street economists including David Rosenberg of Merrill Lynch & Co. and Stephen Roach of Morgan Stanley.

The economists say the Fed must act, for a simple reason: The U.S. has become so dependent on real estate and construction to fuel growth and jobs that an eventual, wrenching correction has the potential to sink the entire economy.

"Act now and cut off the pinky, or wait till later and risk slicing off the entire hand," Rosenberg said in an interview last week. "Either way it hurts, but you can still type with nine fingers."

Greenspan disagrees. While he said on July 21 that home prices may be "unsustainable" in some regions of the United States, the Federal Open Market Committee he leads decided in June that it wouldn't use interest rates to address "possible mispricing," according to minutes of the meeting made public on July 21.

"The Fed is in some sense caught in a box," said Rosenberg, who estimates 60 percent of the United States is experiencing a housing-price bubble. "Housing has been this giant locomotive driving just about everything."

Rosenberg credits housing with 40 percent of the 2.3 million jobs added since the 2001 recession. In a report to clients last week, Lehman Brothers Inc. said related industries accounted for more than a third of the nation's economic growth over the four quarters that ended in March. Fed data show appreciation helped add $5.2 trillion to consumers' balance sheets during the current expansion, or 68 percent of all wealth creation.

An end to the housing boom would leave U.S. growth "well below potential," Drew Matus, senior economist at Lehman Brothers in New York, said in an interview.

Greenspan told Congress in testimony July 20 and 21 that there is "froth in some local markets," repeating a phrase he used in May to describe the run-up in housing prices. While there's a risk of "disastrous" results for individuals with mortgages that depend on appreciation, he said, it's unlikely that localized price declines would hurt the national economy.

"There's enough of a risk that the Fed should be preemptive," Maury Harris, chief economist at UBS Securities LLC in Stamford, Conn., said in an interview. He recommends the Fed keep pushing up its short-term rate, now at 3.25 percent, until market forces raise mortgage rates as much as 0.75 percentage points. Mortgages are linked to long-term bond yields.

Rosenberg says it will take at least three more quarter- point rate increases to slow home-price gains to their long-term average. Citing Greenspan's froth comment, he last week raised his year-end rate forecast a half-point to 4 percent.

Roach recommends the Fed use its "bully pulpit" as a bank regulator to tighten lending practices. "We're in a dangerous place," he said in an interview.

Greenspan is right that concerns about a nationwide bubble may be overstated, Neal Soss, chief economist at Credit Suisse First Boston in New York, said in an interview.

The median U.S. home price surged 51 percent to $219,000 in June from the beginning of the expansion in November 2001, according to the National Association of Realtors. The 15 percent jump from June 2004 was the biggest 12-month gain since 1980, and evidence is mounting that more investors are speculating in real estate, adding to volatility. The run-up was the focus of a special presentation at the last FOMC meeting.

Consumers extracted $1.62 trillion from their homes through equity loans since 2001 and spent as much as half of that, Jan Hatzius, a senior economist at Goldman, Sachs & Co. in New York, said in an interview. That helped buoy spending even before the economy was healthy enough to steadily create jobs starting in mid-2003.

Builders Prosper

Bob Rasche and Howard Wall at the Federal Reserve Bank of St. Louis estimate that 22 percent of the jobs added since the 2001 recession were linked to housing, the economists said in an e-mail. Rosenberg justifies his higher figure by broadening the definition of housing-related to include industries such as home-improvement stores.

Whoever is right, the job growth generated by housing and related industries helped offset losses elsewhere in the economy. Manufacturers slashed payrolls by 1.5 million workers since the recession.

Builders are prospering, with Commerce Department figures showing the industry headed toward its best year in more than three decades.

Huntingdon Valley, Penn.-based Toll Brothers Inc., the largest U.S. luxury-home builder, has a 12-month backlog of orders worth $5.87 billion and is the best performing stock in the Standard & Poor's 400 Midcap Stock Index over the past 12 months. Builders Hovnanian Enterprises Inc. and Ryland Group Inc. also are in the top 10 in the index.

"My backlog is fabulous," Toll Chief Executive Robert Toll said in an interview. "Pinch me."

The Fed contributed to the housing boom by lowering the target for its overnight bank lending rate, the nation's benchmark, to a 45-year low of 1 percent in 2003 to revive the economy after the recession.

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