Fed chief sees home price bubble

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Federal Reserve Chairman Alan Greenspan yesterday said he sees a housing price bubble in "certain areas" and suspects prices are vulnerable to declines, but they will not collapse in any way that threatens the economy.

"I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told the House Financial Services Committee. "I don't expect that we will run into anything resembling a collapsing bubble. I do believe that it is conceivable we will get some reduction in overall prices, as we've had in the past, but that is not a particular problem."

Mr. Greenspan was responding to a question from Rep. Scott Garrett, a New Jersey Republican who said he is buying a house in Washington, one of several dozen urban areas on the East and West coasts that economists suspect may be experiencing housing bubbles.

Washington home prices surged on average by 27 percent last year, twice the national rate. In Northern Virginia and many other parts of the region, home values have doubled since 2000 " a boon to homeowners and housing investors but a bane to those trying to buy into the market.

"The bubble is about to burst as soon as I buy my house down here," Mr. Garrett complained to the Fed chairman.

Mr. Greenspan said homeowners have accumulated considerable wealth because of the rapid run-up in the value of their homes in recent years, and many have been tapping into that wealth through home sales, cash-out refinancings and home-equity loans.

The Fed estimates that home values have doubled from $8 trillion to $16 trillion since 1996, outpacing the rapid growth of mortgage debt, which also has doubled from $3.5 trillion to $7 trillion in that time.

"Remember that there's a very significant buffer in home equities at this stage," he said, referring to the $9 trillion difference between home values and outstanding mortgage debt.

Since most homebuyers have put down deposits of 20 percent, they have that much of a cushion against a potential drop in their home values, he said. Even when homebuyers have obtained loans of as much as 100 percent of a house's cost, he said, the rapid gains in value in many cases has provided them with a buffer against decline.

But the Fed chairman conceded that any drop in home values " which could affect as much as one-fifth of the population, according to private estimates " could put a damper on consumer spending and economic growth. Consumer spending since 2000 has been fed by the "wealth effect" created by rising home values.