Home Mortgage Market, Equity Buoys Economy

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After extracting hundreds of billions of dollars in home equity, American's have more than enough left to stave off any so-called housing bubble.

"There can be little doubt that the availability of a ready source of home equity has reduced the costs and uncertainties associated with income volatility, retirement, unexpected medical bills and a host of other life events that can unexpectedly draw down savings," said Greenspan speaking March 4, before the annual convention of the Independent Community Bankers of America in Orlando, FL.

Due to record low mortgage rates, consumers last year refinanced 10 million home mortgages, excluding home equity and construction loans, to the tune of a record $1.75 trillion representing one-third of the value of all home mortgages. Mortgage originations last year at $2.5 trillion is also a record, said Greenspan.

Refinancing allowed households to cash out $200 billion in home equity, $70 billion of which was used to pay down debt. Estimates indicate half the cash out billions were used for home improvements and other purchases that help bolster the economy.

Greenspan attributed both low rates and easy access to home equity to the growing trend of paying off higher cost debt with the home bank.

Home purchase mortgages last year topped $600 billion increasing the nation's home secured debt by $350 billion -- a figure that matches the the amount of equity the nation's home owners have earned in recent years.

"It is likely, however, that home sellers, after setting aside a down payment for the family's next home, expended a considerable part of their home equity extraction on goods and services," said Greenspan.

"All in all, the amount of previously built-up equity extracted from owner-occupied homes last year, net of fees and taxes, totaled $700 billion by our calculations, or more than 10 percent of estimated equity at the beginning of the year. Home equity extraction for the economy as a whole is, of necessity, financed by debt. In fact, the $700 billion of equity extraction is similar to the increase in mortgage debt last year," he added.

Greenspan said even after the large volume of equity extraction, home price appreciation left home owners with more equity at the end of 2002 than they had at the beginning of the year.

While the chairman expects a slowing of home price appreciation, home buying and refinancing activity, no national housing bubble looms.

"It is, of course, possible for home prices to fall as they did in a couple of quarters in 1990. But any analogy to stock market pricing behavior and bubbles is a rather large stretch," said Greenspan.

Why? Greenspan explains.

• Transaction costs discourage the buying and selling frenzy typically associated with bubbles in financial markets.

• The real estate market is a conglomeration of many local markets where local conditions dominate. "Thus, any bubbles that might emerge would tend to be local, not national, in scope," Greenspan said.

• Supply hasn't outstripped demand. U.S. Census Bureau data suggest that one in three to one in two new households are created by immigrants.

"Clearly, after their very substantial run-up in recent years, home prices could recede. A sharp decline, the consequences of a bursting bubble, however, seems most unlikely...the five-year old home building and mortgage finance boom is less likely to be defused by declining home prices than by rising mortgage interest rates," the chairman said.