12 years ago today, Fed chair Greenspan saw “froth” not housing bubbles

The Orange County Register - Jonathan Lansner - 09 JUN 2017

Happy National Froth Day! Or, perhaps, my condolences!

Twelve years ago today — June 9, 2005 — then-Federal Reserve Board chairman Alan Greenspan — the guy who was once seen as the “maestro” of the economy — went to Capitol Hill and testified he saw “froth” in housing but not a bubble.

His prepared testimony for the congressional Joint Economic Committee went like this:

”There can be little doubt that exceptionally low-interest rates on 10-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”

So today, we lift whatever froth you like — a coffee drink or something fizzy made with grains — as a toast to humanity’s inability to see a brewing bubble.

As Greenspan spoke, national home prices had been on a sharp upswing — including a 15 percent annual gain for the latest quarter. That was the peak of appreciation for that cycle that ended oh-so-badly!

How did Greenspan explain that fateful day?

“In recent years, the pace of turnover of existing homes has quickened. It appears that a substantial part of the acceleration in turnover reflects the purchase of second homes – either for investment or vacation purposes. Transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences – an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past.”

Just a reminder as some speculate today’s housing markets look “frothy.”