Greenspan Cautious on Housing Boom

bloombergU.S. Federal Reserve Chairman Alan Greenspan
America's red-hot housing market will eventually cool down, making some people feel less wealthy and less inclined to be big spenders, U.S. Federal Reserve Chairman Alan Greenspan said Saturday.

Greenspan's remarks, wrapping up a two-day economic conference sponsored by the Federal Reserve Bank of Kansas City, followed up on a strong warning he sounded one day earlier.

The Fed chief last week cautioned Americans against thinking the value of their homes and other investments will only go higher, saying "history has not dealt kindly" with that kind of optimism.

If house prices were to fall suddenly or if interest rates were to rise rapidly, some local housing markets, homeowners and lenders could get clobbered.

Rising house prices have been a key factor in making many people feel more wealthy and thus more inclined to spend. Consumer spending accounts for roughly two-thirds of all economic activity.

"The housing boom will inevitably simmer down," Greenspan said in his remarks at the conference. "As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease," he said.

As a consequence, people taking cash out of their homes through refinancing, selling or other financial arrangements will ease along with "some of the strength" in consumer spending, Greenspan said. The estimates of how much consumer spending will ease differ widely, he said.

An end to the housing boom and a moderation in consumer spending, however, could have a silver lining, Greenspan said.

It could lead to a boost in Americans' personal savings rate, which has been dismally low, and could curb Americans' insatiable appetites for foreign-made goods, helping to narrow the United States' bloated trade deficit, he said.

The broadest measure of trade, called the current account deficit, surged to a record $668 billion last year.

Greenspan, who plans to step down in five months, waxed nostalgic about his 18 years at the helm of the Central Bank, saying he would miss the debates on economic topics with his Federal Reserve colleagues.

Debates on the relative merits of central banks to use interest rates to prick perceived price bubbles in stocks, houses or other financial assets, may intensify in the years ahead, he said.

"But, given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon," Greenspan said.

Looking forward, "The Federal Reserve will almost surely face as many uncertainties over the next 18 years as it has over the past 18," Greenspan said.

Technology continues to bring rapid change, and hence uncertainty, to the global marketplace, he said.

The aging of the U.S. population also will pose challenges, he said, as well as long-term federal budget deficits, if they are left unchecked.

Greenspan was optimistic that his successors would be up to the task.