May 20 (Bloomberg) -- Some regions of the U.S. housing market show signs of unsustainable price speculation and ``froth'' from rapid sales, Federal Reserve Chairman Alan Greenspan said. The surge may ease as homes become less affordable, he said.

``It's pretty clear that it's an unsustainable underlying pattern,'' Greenspan said in response to a question after a speech on energy to the Economic Club of New York. ``People are reaching to be able to pay the prices to be able to move into a home.''

``There are a few things that suggest, at a minimum, there's a little froth in this market,'' Greenspan said. While ``we don't perceive that there is a national bubble,'' he said that ``it's hard not to see that there are a lot of local bubbles.''

Greenspan's comments represent some of his strongest language to date on rising home prices. Fed Governor Donald Kohn said in an April 22 speech that rising home prices now ``raise questions.''

Combined sales of new and existing homes, townhouses and condominiums set four records in each of the past four years, aided by low mortgage rates. The median price of a previously owned home in March rose 11 percent from a year earlier, the biggest 12-month gain since December 1980, according to the National Association of Realtors. Sales of new and previously owned homes are expected to total 7.87 million this year, trailing only last year's record, the group predicts.

Investors

A national bubble is unlikely because the U.S. real estate market is composed of individual regions with different pricing trends, making a collapse that damages the overall economy unlikely, Greenspan said. Home purchases and sales also have high transaction costs, making it hard to speculate, and most people buy homes to live in, he said.

Even so, Fed economists have determined that second home purchases are partly responsible for driving up the ratio of sales to the existing housing stock, Greenspan said. Because buyers could sell without facing relocation costs, the Fed chairman said the more rapid pace of second home purchases may reflect speculation in some markets.

A survey of the Realtors group released March 1 found that 23 percent of homes sold in 2004 were purchased by investors. Nearly 4 in 10 Americans said it is at least somewhat likely the housing bubble in their market will burst within three years, according to a May 13 Experian/Gallup Personal Credit Index poll.

``When you get speculation, there are only a couple of ways for it to end, and they are not good,'' said Jay Mueller, senior portfolio manager at Wells Capital Management, a Menomonee Falls, Wisconsin-based division of Wells Fargo & Co. ``We are nowhere close to income growth matching house price appreciation.''

`Simmer Down'

There's a risk that consumer consumption may decline if the housing market slows, Greenspan said. ``If it occurs, and eventually it will, it will reduce the fairly large and still accelerating degree of extraction of equity from existing homes,'' he said. ``This has been a major force in financing consumption expenditures.''

While Greenspan didn't explain why he expected the surge in home prices to ``simmer down,'' he noted that buyers have to resort to unusual financing techniques, such as interest-only loans, to afford homes now.

There is ``considerable unlikelihood of a major decline'' in prices because that's ``very rare'' in the U.S., Greenspan said.

``Even if there are declines in prices, the significant run- up to date has so increased equity in homes that only those who have purchased just before prices literally go down are going to have problems,'' he said.

Fed's Role

Earlier this week the Fed and other banking regulators warned banks that they should tighten controls on home equity loans that they said are too often offered with no documentation of a borrowers assets.

``That kind of moral suasion approach should probably have been done two years ago,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``It is very hard for them to jack up interest rates to deal with this, but they can get tougher on their guidance.''

Economists such as Stephen Roach of Morgan Stanley have said the Fed helped cause housing and other asset prices to soar by keeping its policy rate at 1 percent for the year ending June 2004, the lowest since 1958, and then raising rates slowly.

One result of the Fed's ``measured'' pace of rate increases is that long-term bond yields, which set the basis for many mortgages, have stayed low. Yields on 10-year Treasury notes are about 4.12 percent, down from about 4.7 percent a year ago.

The rate on a 30-year fixed mortgage this year has averaged 5.78 percent, close to the four-decade low of 5.21 percent that was reached in 2003, according to mortgage purchaser Freddie Mac.

Regional Prices

David Berson, chief economist at Fannie Mae, said in a report this week that the affordability of homes in some regions is at its lowest level since the mid-1980s because of huge prices increases. Nationally, housing affordability, a function of prices, mortgage rates and income growth, is in the middle of its 10-year range.

The median selling price of a previously owned home rose to a record $195,000 in March, the latest statistics from the Realtors group showed. Previously owned homes account for 85 percent of the residential real estate market.

Three metropolitan regions in Florida led the nation in price growth, according to the group. The strongest price increase was in Bradenton, where the first-quarter median price of $275,000 was 46 percent higher than the same period in 2004.

`Hot Spots'

In the San Francisco Bay area, the nation's most expensive region for homes, the median price was $689,200.

``The housing market doesn't have a regional problem; it has localized hot spots,'' said Robert Brusca, president of Fact & Opinion Economics in New York.

The Standard & Poor's Supercomposite Homebuilding Index, which rose 64 percent in the past 12 months, fell 0.7 percent today. Shares of builders Meritage Homes Corp., Toll Brothers Inc. and KB Home have all more than doubled in a year.

Greenspan's housing comments came after a speech on energy prices. The Fed chairman said businesses and consumers are already changing investment and purchasing plans to adapt to higher energy prices and will eventually increase energy efficiency in the U.S.

``With energy prices again on the rise, more rapid decreases in the intensity of use in the years ahead seem virtually inevitable,'' Greenspan said.

The following table shows the median price of previously owned homes rose 9.7 percent, to $188,800, in the first quarter from the year-earlier period, according to the National Association of Realtors' Metropolitan Area Price report: --With reporting by Vince Golle and Kristy McKeaney in Washington, and Howard Liberman and Bernardo Soriano in New York. Editor: Miller

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net.

Last Updated: May 20, 2005 18:04 EDT