Greenspan: Dangers of Further Price Drops

Even with hopeful signs in the economy, afternoon panelists at the NATIONAL ASSOCIATION OF REALTORS®’ Real Estate Summit, “Advancing the U.S. Economy,” here today agreed that:

Stabilizing housing prices is essential to a recovery.

The federal government needs to inject great consumer protection into home lending.

Financial industry reforms should address and protect against systemic risk from institutions deemed “too large to fail.”

Home prices are one of the biggest question marks in the economic recovery. How low can they go? Nationally, on average, prices have declined 30 percent. That’s been great for affordability, but it has been a blow to home owners who find themselves in a position of needing to sell while significantly underwater on their mortgages.

The Danger of Further Price Declines

To exacerbate the problem, increased inventory of unsold single-family homes continues to depress prices, said former Federal Reserve Chairman Alan Greenspan, whose keynote address led off an afternoon of speakers discussing the future of real estate finance.

If prices fall beyond another 5 percent or so, problems in the subprime and Alt-A categories will spill over into the conforming loan category, where defaults are still relatively low, Greenspan warned.

“After September 15—the date of Lehman was allowed to fail—equities fell off a cliff,” he said, losing $35 trillion in value. But in recent weeks, Greenspan said he has seen reasons for optimism.

Since March 9, he said, investors have added $10 trillion of value back into the global system. Real estate markets, he said, are at the beginning of a major liquidization of excess inventories.

“As a result, I expect, I hope, we’ll see stabilization,” Greenspan said. “While there are still great concerns, we’re beginning to see the seeds of bottoming, not in prices yet, but in sales.”

Asked about the future of Fannie Mae and Freddie Mac, Greenspan sounded the theme heard often here today. Organizations that grow “too large to fail” are a danger to the country’s economic health. During the boom, Fannie and Freddie became overlarge and overleveraged. To protect the “very important role of mortgage securitization,” they should be split into smaller organizations, he said. “I don’t think the existing structure is sustainable.”