Boulder Realtor Reviews Alan Greenspan’s Take on the Mortgage Crisis

greenspan.jpgReading Alan Greenspan’s comments and opinions in the WSJ recently got the attention of this Boulder Realtor. While many are critical of Bernanke and his apparent inability to properly gauge the current situation and how he should respond as Fed Chairman, plenty of people still marvel at Greenspan and his track record.

Greenspan commented on several aspects of the now so called mortgage crisis and even said that it was an accident waiting to happen. Further he said that if the crisis hadn’t been sparked by the mis-pricing of securitized sub-prime mortgages, it would have been produced by eruptions in some other market.

He goes all the way back to the Cold War and proposes that the current crisis is tied to when the Soviet Bloc economy’s ruin became apparent to the world through the fall of the Berlin Wall. Discredited Third World central planning was quickly displaced by market capitalism.

A shift happened and as a result, since the year 2000, the actual Gross Domestic Product growth of the developed world has been overshadowed by the developing world by almost double.

Add to that major drops in global real estate interest rates for the last 15 to 17 years. Then he points out that in the developing world, consumption apparently couldn’t keep up with surging income and consequently the savings rate of the developed world soared between ’99 and ’06 which outstripped it’s investment rate in the same period.

Greenspan seems to think that perhaps Bernanke can’t or shouldn’t be held responsible on some level. Greenspan comments that his 50 or so years of watching prices bubbles come and go lead him to conclude that monetary policy in and of itself can’t defuse these situations. Seems he thinks that ultimately the “human euphoria” has to ride itself out on it’s own.

However, he agrees that the low federal funds rate post-dot.com crash and the 1% rate in mid 2003 consequently lowered rates on ARM’s which all possibly led to higher U.S. home prices. Greenspan seems to believe though that the overall impact of the additional buyers in the marketplace due to low ARM rates really didn’t have a significant impact on the demand for homes.

It wasn’t so much the low rates of ARMs that drove demand but rather the accelerating expectation that rising prices would continue. Home prices actually continued to rise across the nation for about two years beyond the peak of loan originations using ARM products.

He goes on to comment that the central banks appear to have lost control of longer term interest rates. This is something we acknowledge at a local and regional level constantly as we see the effect of the central bank’s decisions and how it impacts assets with shorter maturities and also the central banks ability to affect prices or at least their ability to contain pressures on the prices of services and goods. This is typically the conventional methood for measuring inflation. Your HELOC or your revolving credit rate may flex but the overnight Fed rate won’t do much to affect your rate on the 30 year loan you’re contemplating on that purchase or refinance you’re in the middle of finishing.

We’ve observed in regional locales such as Erie, Frederick, and Longmont that higher inventory levels have made these and similar markets difficult for sellers and kept market prices lower than preferable for sellers. Greenspan concurs that the current credit crisis will begin to end when this excess baggage of overbuilt inventory of newly constructed homes is finally sold. New construction needs to slow to allow demand to catch up with supply.

Greenspan further comments:

…when home price deflation comes to an end, that will stabilize the now uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

For the local Boulder real estate market and some of the closely positioned communities like Superior, Louisville and perhaps portions of Lafayette, the demand remains high and the investors are already moving in to pick up the properties on sale. Soon these properties will fall into the hands of well-qualified buyers with long-term financing solutions. We may even see some of the homeowners that went from renter, to ARM facilitated homeowner, moving back into the renter / tenant spectrum as the situation settles out.

The local market has been shifting ahead of the curve as usual and the buzz in the industry locally is that things began shifting to a more positive direction many months ago and 2008 looks to be a good year.

Comments

One Response to “Boulder Realtor Reviews Alan Greenspan’s Take on the Mortgage Crisis”

  1. Steve Renquist on December 29th, 2007 5:14 pm

    I’ve been reading your blog for a while and notice that you include both Boulder info and national info.
    I think your view on the difference between what you see in the local market vs. what we hear in the national media is intriguing.

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