Greenspan Sees ‘Seeds of a Bottoming’ in U.S. Housing - Bloomberg

By Vivien Lou Chen and Dawn KopeckiMay 12 (Bloomberg)

Former Federal Reserve Chairman AlanGreenspan said that the decline in the U.S. housing market maybe bottoming and it’s “very easy to see” financial marketscontinuing to improve.“We are finally beginning to see the seeds of abottoming” in the housing industry, Greenspan said today duringa conference of the National Association of Realtors inWashington. The U.S. is “at the edge of a major liquidation”in the stock of unsold properties, which may help to stabilizeprices, Greenspan said.Home-sales figures in recent weeks have shown a slower paceof decline, and the slide in property prices has eased,according to gauges including the S&P/Case-Shiller index.The former Fed chief, who was among the first prominenteconomists to warn about the risk of a recession in 2007, saidhousing prices could fall another 5 percent without putting toomuch strain on the economy.“We run into trouble if it’s very significantly more thanthat,” Greenspan said. Housing prices remain “the criticalAchilles’ heel” of the economy.While the housing bottom may not be obvious in prices, itis becoming clear in “significant regional differences,” wheresome of the hardest-hit areas are starting to show signs ofimprovement, he said.Greenspan said in congressional testimony in October that“a flaw” in his free-market ideology contributed to the“once-in-a-century” credit crisis.

Less Trouble

Today, Greenspan said companies are having less troubleraising money. U.S. firms have sold bonds at a record pace sofar this year, including a $3.75 billion offering today fromMicrosoft Corp., the world’s largest software maker.Wells Fargo & Co. and Morgan Stanley raised $16.6 billionin stock and bond sales on May 8, just a day after thegovernment ordered them to raise capital, becoming the firstbanks to respond to the government’s mandate.“Company after company has been raising capital and theyare getting far more than they expected,” said Greenspan, 83,who left the Fed in January 2006 after almost two decades at thehelm and has returned to his former role as a private economicforecaster. With the expansion in market liquidity, “you begin to see,as we are seeing today, a very significant rise in theavailability of money,” Greenspan said. As markets improve,“it’s very easy to see that it’s going to continue for anindefinite period,” he said.

Prices Fell

U.S. home prices fell the most on record during the firstquarter from the prior year as banks sold seized homes andforeclosures persisted at a high rate in California and Florida.The median U.S. housing price fell 14 percent during the quarterto $169,000 year-over-year, the National Association of Realtorssaid earlier today.U.S. banks held $26.6 billion of repossessed real estate atthe end of 2008, more than doubling from a year earlier,according to the Federal Deposit Insurance Corp. in Washington.Greenspan’s decisions as a central banker have come underscrutiny in recent years after the fall in home prices triggereda collapse in mortgage financing and other credit.Under Greenspan’s leadership, the Fed left the overnightlending rate between banks at 1 percent from June 2003 untilJune 2004. Regional Fed presidents such as Gary Stern ofMinneapolis and Janet Yellen of San Francisco have publiclyquestioned the Fed’s hands-off approach toward asset bubbleslike the one that emerged in house prices during Greenspan’stenure.

Kept Rates Low

Former Fed Vice Chairman Alan Blinder, Stanford Universityprofessor John Taylor and other economists say Greenspan’sapproach of keeping rates low for an extended period helped tofoster the housing bubble.“I’ve always argued going back many decades that you donot capitalize a piece of real estate with overnight interestrates,” the former chairman said today in response to anaudience question.The housing market is instead fueled by a decline in long-term interest rates, which started a full year before the Fedbegan cutting the federal funds rate, Greenspan said.“I think there is a recalibration of financial historythat I find very puzzling,” he said.Referring to his critics, he said, “I can say that Irespectfully disagree. They’re wrong.”