Greenspan Sees Need for Housing Prices to Rise 10%

Former Federal Reserve Chairman Alan Greenspan said a recovery in the U.S. housing market may not be solid until home prices rise by at least 10 percent.

“Stabilization is important not only to the housing market, but to the economic recovery as a whole,” Greenspan said today in a speech at the Brookings Institution in Washington. “Home prices will have to rise unequivocally and perhaps by 10 percent or more before signs of a full-fledged housing recovery become unambiguous.”

Home values in the U.S. fell during the fourth quarter as mounting foreclosures sidelined buyers who think prices may decline further. The median price of a single-family home dropped from a year earlier in 71 of 152 metropolitan areas tracked by the National Association of Realtors, the group said yesterday.

The number of homes in foreclosure in December rose to a record 2.2 million, according to Lender Processing Services Inc., based in Jacksonville, Florida. Including foreclosures and late payments, there were 6.87 million non-current mortgages, the company said.

Owners won’t be able to borrow more against the equity in their homes, which provides more for spending, until the value of their houses increases, Greenspan said. Household spending makes up about 70 percent of the economy.

After demand for houses peaked in 2006, home prices in the U.S. tumbled for three years in a “largely futile endeavor to uncover enough demand to absorb the inventory excess,” Greenspan said.

Fueling Demand

To lift prices, demand must be driven by either an increase in the rate of household formation or an increase in the share going toward owner-occupancy, according to Greenspan.

“Tax credits rarely do either,” he said.

In response to audience questions, Greenspan said the rise in equities has created a “wealth effect” that is prompting consumers to boost spending. The Standard & Poor’s 500 Index has advanced 17 percent since the beginning of last year.

“What we are in the process of seeing is the fact of the wealth effect in the consumer markets,” Greenspan said, pointing to household spending, which grew 4.4 percent during the fourth quarter.

“In the last four or five months, these markets are beginning to look very much like they used to prior to the crisis,” Greenspan said.

“This thing is just building, and if we somehow could get beyond this very heavy overhang in the residential housing markets it would be very helpful,” he said.

(Updates with Greenspan’s comments on wealth effect in ninth paragraph)
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