Wednesday, July 20, 2005

Greenspan Warns of "Speculative Fervor"

In a speech to the U.S. House of Representatives Financial Services Committee Federal Reserve Chief Alan Greenspan
said today that he's concerned about all the flippers in the housing market:
"Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor."

He was, of course, talking about what we've termed "The Flipper Factor." But Greenspan went deeper than that and also talked about the different loan products that are setting many families up for certain disaster:
The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market. Moreover, these contracts may leave some mortgagors vulnerable to adverse events.

What makes Greenspan's remarks to the committee significant is that they seem to reflect a growing sense of concern at the Federal Reserve and elsewhere in the Fed about the possibility that a series of bubble pops could occur in local markets, sending the value of homes tumbling down.

made a similar observation:
Wednesday's warning of "speculative fervor" in housing appears to punch the Fed's level of caution up a notch from an earlier warning of "froth" in some areas, some market participants and economists said.