July 20, 2005
The Chairman of the Federal Reserve has told Congress that interest
rates will continue their steady rise, and that eventually that will
put an end to escalating real estate prices in some markets.
In fact, Alan Greenspan says he's confident some home prices will go down.
"This type of expansion in prices historically does not go on very long and indeed, while it's hard to forecast and I'm not sure that it's going to occur, there may be -- there certainly will be in certain local areas -- price declines," Greenspan said in his semi-annual Monetary Report To Congress.
Greenspan hastened to say that he believed that falling home prices would occur only in a few areas, and that the overall housing market would not be affected. He did say, however, that a price dip could hurt individual homeowners, especially those with little equity and "exotic" mortgages, such as those requiring interest payments only.
"He is confident that the previous national impacts will not be repeated even if there are some regional problems," said economist Joel Naroff, of Naroff Economic Advisors.
Naroff says the housing market appears sound for now because the overall economy remains solid. Even so, he says the Fed Chairman remains concerned about inflationary pressures that remain in the economy.
The Fed's monthly upping of the Federal Funds Rate is designed to hold that in check. In his testimony before Congress, Greenspan appeared a little puzzled these steadily rising rates haven't also raised mortgage rates.
In fact, Greenspan notes that mortgage rates have actually gone down, adding fuel to the real estate rally.
"This decline in long-term rates has occurred against the backdrop of generally firm U.S. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast approaching retirement of the baby-boom generation," Greenspan observed.
"The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. Such a pattern is clearly without precedent in our recent experience."
