http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=43611There has been a lot written on the housing bubble recently. On May 20, Alan Greenspan, Chairman of the Federal Reserve made the statement that there is no national housing bubble, but then stated, “There are a lot of little bubbles around the country”. Chairman Greenspan went on to tell the Economic Club of New York, “Without calling the overall national issue a bubble, it’s pretty clear that it’s an unsustainable pattern”. This is not the normal “Fed speak” The chairman is apprizing the investment community of the Fed’s concern in pretty plain language.
There is evidence that the Fed has begun to move to contain the housing bubble using credit standards in place of interest rates. With a little noticed memo, several Federal regulatory agencies have begun a major crackdown on excessive home equity lending. In an unusual joint release issued on May 16,2005 by the Federal Reserve Bank, Controller of Currency, FDIC, Office of Thrift Supervision and the National Credit Union Administration.
http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050516/default.htm. Entitled “Agencies Issue Credit Risk Management Guidance for Home Equity Lending,” the Federal agencies laid the groundwork for a tightening of lending standards for home equity loans and lines of credit. At present there are over $880 billion of the loans outstanding according to the Federal Reserve. It should be noted that these are mainly second loans not primary mortgages, although I suspect that primary mortgages maybe next on the list. In speaking with several of these agencies my impression is that there is concern that lending standards have slipped and the agencies would like to see them tightened. In addition, as many of these loans are floating rate loans, they would like to see the loans vetted for inherent vulnerability to rising interest rates. Consumers have used these loans to buy more real estate, pay off credit cards and maintain consumer spending at the expense of saving. In addition to cooling down the real estate market this will further slow down consumer spending.
We believe this is a major move by the Federal Reserve to control the bubbles in the real estate markets, We also think that there will be other moves to get slow the lending and thereby cool the home market down.Michael Mandel at Business Week recently produced an excellent piece on the housing bubble, writing that “Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product. That’s the highest level since the late 1940s and early ‘50s, when an entire generation of returning soldiers was setting up families and expanding into newly built suburbs. This time, Americans are building second homes and enlarging current ones at a record pace.
By comparison, the tech boom of the ‘90s was at worse a baby bubble. Starting in 1991, business investment in information technology and communications began a steady climb going from 3.1% to a peak of 4.8% in 2000 before collapsing.
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