Housing market is a bit frothy

by Mary

Alan Greenspan notes the presence of bubbles in the housing market. But he says because it only affects a few regions in the country, he doesn't see that it is a real threat to the economy.

The Fed chief said Friday that he didn't see a national housing bubble and that the economy was not at risk, an assertion he had also made in February.

"But it's not hard to see that there are a lot of local bubbles," he said Friday, without specifying these local markets. Greenspan said price surges might "simmer down" as housing became less affordable.

"It's pretty clear that it's an unsustainable underlying pattern," the Fed chief said. "People are reaching to be able to pay the prices to be able to move into a home.

Greenspan might not think it's much of a problem because it is isolated in just a few regions, but there are definitely some worrying signs on the horizon for a number of recent home buyers. In the second half of 2004, almost two-thirds of the mortgages used to purchase homes were ARMs (Adjustable Rate Mortgages) or interest only loans.

Living in California, it's clear the housing market is badly overheated and those who are still entering the market have a good likelihood of holding the bag when California's bubble bursts. And to understand how big the bubble is in California, check out this house in the Santa Cruz area. (Via Seeing the Forest)

Just like during the dot com bubble where Greenspan watched the froth get firmer and the bubbles get larger until the whole thing came tumbling down, some economists are worried that Greenspan is doing little to stave off a serious problem.

But Greenspan's remarks may be "too little, too late," said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast who has been among the few economists to emphatically describe California's housing market as a bubble.

People have been freely spending "because they feel wealthy" thanks to soaring home prices, he said. "They feel their houses are worth so much more."

"When the market cools, it will have implications beyond real estate," Thornberg added. "Consumers overall will pull back on spending."

No kidding. Dropping wages, rising prices and the effect of rising interest rates on mortgages should put a crimp on the ordinary American's ability to buy much stuff.