- The Washington Times - Wednesday, September 12, 2001

Get ready for the next economic bubble. The first one, in stocks, expanded mightily during the late 1990s, then burst after March 2000. The next one, in housing, is being spurred by Federal Reserve Board Chairman Alan Greenspan's failure to cope successfully with the aftermath of the stock bubble and might also be moving with all deliberate speed toward a reckoning day.

Recall the scenario:The Greenspan-led Fed began cutting interest rates in January 2001 in order to restore some of the lost wealth investors in stocks had sustained. The economic logic, illustrated in some downturns in the past, was that if interest rates were cut, the stock markets would rally.

Yet the markets headed south, even though Mr. Greenspan and company would continue lowering rates, to the tune of 3 percentage points in eight months. Hoping to find a ray of light in an otherwise deteriorating situation, the Fed and some economists began to argue that money investors had lost in stocks was being returned in the rising value of American homes. In other words, the Fed policy of cutting rates really was working because now Americans could acquire, as well as refinance existing, mortgages at lower rates.

The problem with such logic is that it mirrored the earlier bubble in stocks. Instead of trying to stick to traditional yardsticks of assessing prudent value of investments, bankers and homeowners rushed to refinance mortgages at levels well beyond oldtime standards. For example, in the past homeowners were cautioned never to borrow more than 80 percent of the pretty-certain-value of your house (what you paid for it). That way, one always had a cushion of equity if prices fell.

But many mortgages are near or above fair market value because lenders want the bigger principal on which to profit from interest, and homeowners, whether gaining new loans or financing old ones, want extra money to spend elsewhere. The result is that many banks are saddled with overvalued houses that homeowners would be hard-pressed to sell should the economy really turn sour; that is, should unemployment rise significantly and consumer spending hibernate. Unlike stocks, houses are illiquid: You can't sell a house today and get your money immediately. Nor is the fair market value listed daily, as are stocks, on some ledger. That means a downturn in housing prices would result in a surplus of houses for sale. And banks and S&Ls that exceeded prudent lending limits (remember their fall under similar conditions in the 1980s?) would be hard-hit.

Clear signs of an overpriced housing market abound. Nationwide, housing prices have increased by 8 percent a year. In the District, prices have spiked 18 percent. And in Palm Beach County, Fla., median home prices half cost more, half cost less have increased 10 percent since July 2000. Who's to say that much of this rise isn't attributable, as it was for stocks during their heady, speculative days, to bankers and assessors simply agreeing, yeah sure, that the property was worth more?

And who's to say that the bubble hasn't already popped? You won't find the following information in big, bold type from realtor associations, but in July sales of used homes fell 3 percent from their June levels. And, in some areas already, there's a glut of homes for sale. In Denver, for instance, there are 40 percent more homes on the market today than a year ago. One other piece of fine print: Median housing price across the nation fell in July from $152,200 to $150,800.

Like the stock market over the last several months, where some experts with a personal financial stake in selling shares appeared on TV or in newspaper interviews urging investors to look to the long run, realtors are not likely to be the first to herald a souring housing market. And Mr. Greenspan, because he speaks in financial tongues, isn't likely to make it perfectly clear what the Fed's next battle plan should be if real estate, like stocks, actually tank.

There is no magic cure for an economy turning downward, especially as global markets experience the same phenomenon. Individuals and businesses must tighten their belts, reduce debt, save more, and get their economic house in order policies that the Fed should encourage.

Thomas V. DiBacco, university professor, historian and author, lives in Palm Beach, Fla.

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