Bubbles Greenspan - so sez the Wall Street Journal

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Monday May 23, 2005 · 6:16 AM PDT

2005/05/23 · 06:16

From today´s Wall Street Journal (no link, behind subscription wall)

A grozing number of people are tapping into their home equity to invest in more real estate.

That´s like using a margin account to buy stocks

Many Americans are incredibly reckless in assuming that real estate prices will keep rising or, at worst, flatten out. It´s a classic phenomenon you expect to see in a speculative bubble

When will the frenzy die down? "The way the consumer operates, they usually don´t back away from winners until they become losers"

They also quote Bubbles Greenspan, who has effectively conceded on Friday that the recent pace of house price inflation was unsustainable and strains were starting to show. (FT, 21 May)

A slowdown in house price growth was likely and this would in turn mean less of the support for consumer spending seen in recent years.

Even so, the housing market was unlikely to be "a large macroeconomic issue" for the Fed, he told the Economics Club of New York.

Mr Greenspan stressed the large and diversified nature of the US housing market as making a national bubble unlikely, although there was "froth" in the market. An increase in second houses - as vacation homes or investment properties - might be a sign of speculative excess.

The growth of interest-only mortgages and other exotic deals suggested people were having difficulty affording houses and that the market would soon "simmer down", he said.

Where house prices fell, it was only people who had bought immediately before the turn who might suffer problems. "The presumption there are a lot of bankruptcies out there does not seem credible," he said.

That´s a lot of negative input for a supposedly upbeat message. He is worried, but can only admit it obliquely for fear of panicking everybody. Take the hint, people.

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Bubbles Greenspan - so sez the Wall Street Journal

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