Friday, August 26, 2005

Greenspan: Housing boom is an economic imbalance"

(From CBS MARKETWATCH.COM)

"In his sharpest warning to date about rising home prices, Federal Reserve Chairman Alan Greenspan said the housing boom is an economic imbalance that could end badly.
In his final appearance at the high-profile policy conference at the Jackson Hole resort, Greenspan said high home prices are partly due to the low risk premiums demanded by investors, which have kept interest rates low.

In recent months, Greenspan has increased the level of his rhetoric about the housing market. In May, he said he saw signs of "frothy" housing markets in some regions. He has been consistent in his judgment that there is no national housing bubble.
In July, Greenspan said he believed exotic new mortgage products, such as interest-only loans and hybrid adjustable-rate loans, were of "particular concern" because homebuyers could find themselves unable to make mortgage payments if interest rates rise.

Greenspan has said, however, that the Fed's 10 interest rate hikes in the past 14 months were not designed specifically to cool the housing market or to keep housing prices from rising."


Read the full article here...

Well, it seems the Maestro has spoken once again. To me, he seemed unusually direct in his statements today. Usually you have to go over his speaches with a thesaurus and a book on ciphers. Here he seems to be very clear in his concern for the future of interest rates and how those rates will affect homeowners. Many people continue to go with short term ARMs and Interst Only loans in order to afford more home. It seems that Greenspan feels chaos could be forthcoming if those rates after the inital period pop upward.

Greg McBride from Bankrate.com agrees. "Concerns about deflating real estate values revolve around the prospect of millions of borrowers facing sharply higher payments in the future. Regardless of the drop in fixed mortgage rates, many adjustable-rate and interest-only borrowers are on just such a collision course. With eight, going on nine, interest rate increases in the past year, and more yet to come, the Fed may have an influence on mortgage rates and the housing market after all." Read his observations here.

I myself have been telling most people these days to go with the unexciting, vanilla 30 year fixed mortgage. No, it's not as sexy as some of these Option Arms and I/O products, but its hard to argue with long term stability, especially since rates are still so historically low. Don't get me wrong, those types of niche products certainly are going to have a place at the table for a long time to come. I sell them every day. My point is that they are not for EVERYBODY and one has to carefully weigh the pros and cons based on their OWN SITUATION before jumping in one of these. I'll try to hit upon the specific pluses and minuses of these niche products over the next few weeks.