Fed chief: right or wrong?
Sees housing decline
BY LORE CROGHAN
DAILY NEWS BUSINESS WRITER
Fed chairman Alan Greenspan's warnings ...
... of an end to the housing boom is drawing cheers and jeers from real estate experts.
The end is near - and that's not some revivalist preacher talking hellfire and damnation. It's Fed guru Alan Greenspan warning repeatedly in recent days that the housing boom's days are numbered.
In New York, where real estate is one of our biggest obsessions, his warnings have caused ripples of anxiety.
True, this is the man who cautioned about "irrational exuberance" in the stock market in 1996, and stocks didn't tank until four years later. But he's one of the savviest financial thinkers of our day - and ultimately stocks did take a dive, and fortunes were lost.
Just yesterday, however, figures released show that home prices jumped 13.4% from April 2004 through this June, the biggest increase for a comparable period in more than a quarter-century.
The Office of Federal Housing Enterprise Oversight, which oversees mortgage-finance giants Fannie Mae and Freddie Mac, said it is the latest affirmation of the housing market boom that has pushed home sales to record highs as house prices have surged.
So, is Greenspan right? Is the housing market headed for a downturn soon? Experts contacted by Your Money take sides.
GREENSPAN'S ON TARGET
"The inventory of unsold homes has been building in the past four or five months - which is not surprising, as affordability has gotten stretched and stretched, and creative financing has grown more absurd," said hedge fund manager Doug Kass of Seabreeze Partners.
"Every bubble has the same characteristics - and I see them in housing," he said.
"Debt is plentiful and cheap. There's egregious use of leverage. And you have the introduction of a new class of buyers that artificially buoys demand and inflates prices," Kass said.
The new class of buyers are investors - called "flippers" because they buy and quickly re-sell homes, strictly to make money rather than secure a place to live. Kass likens flippers to the day-traders who helped drive up stock prices to unsustainable highs in the late 1990s.
Markets like Phoenix, Las Vegas and parts of California, where flippers have a foothold, will see particularly harsh drops in home prices, Kass predicted.
In New York City, there's been relatively little flipping - which will help apartments and houses retain their value.
Also, less than 10% of home purchases in the city have been funded with interest-only loans - while this risky form of financing was used in a hefty 48% of home purchases in California.
"In the downturn I foresee, no market will be immune," Kass said. "But New York will weather the decline better than other markets."
Ken Mayland of forecasting firm ClearView Economics said Greenspan's pushing homebuyers to be more careful about the kind of financing they use.
"He's paid to be a professional worrier," Mayland said. "He's trying to protect the banking system.
Mayland predicts that housing will be a "slight drag" on economic growth next year and price increases will slow. So it's goodbye, boom.
In some places, prices will drop next year, Mayland said. For instance, on Florida's Atlantic and Gulf coasts, watch out for falling condo prices.
New York City can expect a happier fate - along with Boston and San Francisco. All three cities should see home values keep on climbing in 2006, Mayland expects.
GREENSPAN'S OFF THE MARK
"He's trying to use the strategy of Greenspan-speak - to temper homebuyers' euphoria," said Jonathan Miller, CEO of appraisal firm Miller Samuel.
That's because a year's worth of interest-rate increases by the Fed has failed to push up mortgage rates enough to slow buyers down.
"Nationwide, the torrid pace of housing-price increases can't be sustained. But that doesn't mean a moderate pace of increasing home prices can't continue," he said.
Housing prices will keep heading upwards, Miller predicted - unless mortgage rates spike. The 30-year fixed mortgage rate is now around 6%. To precipitate a real estate downturn, rates would have to shoot up to 7.5% or 8% - which he doesn't foresee any time soon.
Miller feels particularly confident about the strength of the local housing market. "I'm more bullish on New York City than other parts of the country," he said.
His reasons: a city free of fiscal crisis; a limited supply of apartments and houses, and strong demand; a thriving financial sector - thank goodness for Wall Street bonuses; and increases in employment and incomes in other businesses.
Miller is concerned that skyrocketing gasoline prices could trigger inflation - which would make investors lose their enthusiasm for long-term bonds, he said. If this happened, mortgage rates would spike after all, and it would be bye-bye, boom.
Lynn Reaser, chief economist of Bank of America's investment strategies group, has a different interpretation of the impact of high fuel prices on housing.
"Ironically, in the near-term, high oil prices are helping to keep the housing boom strong," she said.
"The bond market reads higher oil prices as a damper on growth," she explained. "This could help keep our mortgage rates low."
Low mortgage rates have kept the housing boom going, in New York and the rest of the nation.
And when the boom does end, she doesn't expect a catastrophic bust.
Instead, Reaser's looking for a "soft landing," she said, "with a leveling or slowing of price increases, and price declines in overheated areas."
Lessons learned from last bust
New Yorkers have good reason to get nervous when Fed pundit Alan Greenspan warns the housing boom's about to end.
Those over 40 remember all too well what can happen in this town if a real estate boom turns to bust.
The city's last real estate crash was protracted and painful. Home prices started dropping in mid-1989, then fell faster during the next two years as recession took hold. Prices didn't bottom out until late 1995.
During that time, people who had bought Manhattan apartments at the market's late-1987 peak saw the value of their purchases fall by almost half - from a median price of $375,000 to $200,000, according to Jonathan Miller of appraisal firm Miller Samuel. It took another four years for prices to return to peak levels.
"It felt like there would be no end," recalled Miller.
Since then, the city's housing industry has learned some lessons about prudence - which may help prevent the next market downturn from being as nasty.
Bankers have learned to exercise more caution in lending to developers. Builders have learned to make sure there will be takers for what they're peddling, at the prices they're asking.
Now developers do marketing studies to determine what potential customers want, what size apartments to build, what amenities to include, and whether to include terraces with wood decks or swimming pools with retractable domes.
The glut of plain-vanilla box apartments that sat unsold after the last bust are now a bad memory, experts said.
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