Most Homeowners Not Overly in Debt, Fed Chief Says

09/27/2005

By EDMUND L. ANDREWS
NY Times
Published: September 27, 2005

WASHINGTON, Sept. 26 - With new evidence that the housing market remained red hot last month, Alan Greenspan said on Monday that the vast majority of homeowners are not yet stretched too thin.

But Mr. Greenspan, the Federal Reserve chairman, warned that the use of “exotic” mortgages could be pushing prices higher and inducing some homebuyers to take on too much risk.

Even as he warned about the increasing use of interest-only loans and no-money-down loans, which can become risky if interest rates rise or housing prices fall, Mr. Greenspan argued that only about 5 percent of all families have borrowed more than 90 percent of the value of their houses.

“The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices,” he said. Mr. Greenspan told a banking conference on Monday that speculation in the housing market may have spilled over into the mortgage markets as more and more people use interest-only loans and other techniques to buy homes they might otherwise be unable to afford.

“The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny,” he said.

Though such loans have appropriate uses, he continued, they could also provide a way for marginally qualified buyers to borrow heavily and buy homes at inflated prices.

“In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses,” he continued.

Though Mr. Greenspan said the vast majority of homeowners were not overextended, his comments on Monday were his sharpest warning yet about the proliferation of new loans that have helped push the household savings to a rate below zero. On Monday, the National Association of Realtors reported that the median sale price of existing homes hit a record $220,000 in August, up 15.8 percent from one year earlier.

Sales of existing homes climbed 2 percent in August and reached an annual rate of 7.29 million. That was just short of the record 7.35 million, set in June.

Analysts said there were some hints that the hot housing market may be cooling just a bit. The inventory of homes for sale edged up in August, and the amount of time that houses in many cities are sitting on the market is somewhat longer than earlier this year.

But many economists contend that a housing bubble is evident in many parts of the nation, especially around big cities on the East and West Coasts, and that housing affordability has declined to an unusually low level even though mortgage interest rates remain at nearly historic lows.

Mr. Greenspan’s message on Monday was twofold: first, that the use of exotic new mortgages could be aggravating the run-up in prices and inducing some families to take on too much risk; second, that the finances of most households are still on solid ground.

In an indication of his own intense interest in the issue, the Fed chairman cited new data that he had personally assembled in collaboration with his staff.

With only a few months left before he is scheduled to retire in January, Mr. Greenspan seemed intent on defending his legacy against critics who contend that the Fed’s policy of keeping interest rates low contributed to a speculative fever in the housing market.

Citing new data collected by the Federal Reserve, Mr. Greenspan noted that there was little correlation between states with the biggest increases in prices and states with the highest concentrations of multiple loans, called “piggy back” loans, that allow people to borrow almost the entire purchase price of a home.

According to the Fed data, the five states where piggy-back loans were particularly common this year were Texas, California, Utah, Oregon and Colorado. While prices in California have climbed faster than in almost any other state, those in the other four states did not climb faster than average.

Indeed, the size of the mortgage as a share of the total purchase price tends to be lower in states with the most rapid price appreciation. The reason, Mr. Greenspan hypothesized, is that people in torrid markets like Southern California are selling houses as well as buying them.

By any measure, American homeowners have taken on far more debt in the last few years.

The total amount of outstanding household debt climbed at an annual rate of more than 17 percent in the first half of this year and an average annual rate of 16.4 percent over the previous four years, according to an analysis of Fed data by the Federal Markets Center, a nonprofit research organization in Virginia.

The amount of cash that people pulled out of their homes by refinancing their mortgages was equal to about 5 percent of the nation’s gross domestic product last year, according to estimates by Goldman Sachs.

Mr. Greenspan predicted on Monday that savings would climb again when interest rates rise and the housing market cools. Many analysts agree, but caution that spending could slow at the same time.