Wednesday, August 31, 2005

Bartlett: Housing Balloon or Bubble?

by Bill McBride on 8/31/2005 01:11:00 AM

Bruce Barlett writes in the Washington Times:

Over the weekend, Federal Reserve Chairman Alan Greenspan warned housing boom speculators should be very careful. What goes up fast can come down just as fast.

A key underpinning of the housing price surge is the lenders' belief risks have fallen. They therefore became more willing to lend on terms they would not have extended in the past. This made available mortgages to previously unqualified borrowers and bigger mortgages to those with good credit.
Bartlett then reviews many of the riskier loans available these days. He concludes:
Though he is no alarmist, Mr. Greenspan warned Friday that if lenders should perceive greater risk, rates could rise and borrowing qualifications tighten quickly. "Newly abundant liquidity can readily disappear," he noted.

Access to mortgages will become much more limited, people will have less money to pay for housing, and this must bring prices down. A mild downturn could thereby become a collapse, with consequences throughout the economy.
I suggest reading the entire commentary.