Wednesday, 9 April 2008

House prices falling, Greenspan's reputation not far behind

While some semblance of calmness has been restored to financial markets in recent weeks, there is still risk of more turmoil ahead.

For one, weakness in housing has clearly spread to the UK. Reuters reports:

House prices fell 2.5 percent during last month, the Halifax said, more than six times as much as analysts had forecast and the largest monthly decline since September 1992.

Meanwhile, the US housing market continued to deteriorate in February. Bloomberg reports:

The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating no sign of a bottom in the U.S. real-estate recession that is entering its third year.

The National Association of Realtors' index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001, the group said today. The drop follows a revised 0.3 percent increase in January.

If these trends are sustained for much longer, the recent IMF estimate of losses could start to look conservative. From Bloomberg:

The International Monetary Fund said losses stemming from the U.S. mortgage crisis may approach $1 trillion, citing a "collective failure" to predict the breadth of the crisis.

Falling U.S. house prices and rising delinquencies may lead to $565 billion in residential mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including those tied to commercial real estate, may reach $945 billion, the fund said. The fund also saw as much as $90 billion in further losses from potential downgrades of bond insurance companies.

On the other hand, a famous ex-central bank chief is looking for an end to the deterioration in the housing market. From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan 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.

"It will not be until early 2009 that we will get close to having eliminated most of this" home inventory, Greenspan told a conference in Tokyo today sponsored by Deutsche Bank AG and co-hosted by Bloomberg LP. "But it is very likely that home prices will stabilize well before that."

Not that he thinks there won't be pain along the way.

Greenspan said today that "the current credit crisis is the most wrenching in the last half century and possibly more." He added in [a] CNBC interview that while the economy was "in the throes of a recession," the non-financial part of the economy is in "good shape."

But Greenspan's views may not be held in the same esteem as they once were.

Greenspan, who retired in 2006 after 18 years as the U.S. central-bank chief, has come under increasing criticism for his policies as last year's subprime-loan meltdown spread into a broader financial crisis. One recent book, "Greenspan's Bubbles" by money manager William Fleckenstein, argues the former Fed chief helped inflate stock and home prices...

Yesterday, in a Financial Times piece headlined "The Fed is blameless on the property bubble," Greenspan wrote that the evidence is "very fragile" that Fed interest-rate policy added to the U.S. bubble and that "it is not credible that regulators would have been able to prevent the subprime debacle."

For more on the debate over Greenspan's role in the housing bubble, see this post at the Economists' Forum as well as Willem Buiter's extended critique.

Greg Ip also has a WSJ article on criticisms of Greenspan. However, this article appears slanted to favour Greenspan because, as Dean Baker points out, it "focuses on the views of the critics who only recognized Greenspan's failings in retrospect", making it easier to dismiss those criticisms.

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