« Countdown to Meltdown: Doomsday scenarios for "Hallucinating Homebuyers" | Main | From froth to foreclosures: You ain't seen nothing yet! »

June 09, 2005

Greenspan's "Interest Rate Conundrum"

While Fed Chairman Alan Greenspan once again told Congress he does not see a national housing bubble, he repeated his warning of May 20, the day Greenspan first used the "F" word:

"...at a minimum, [there are] signs of froth in some local markets where home prices seem to have risen to unsustainable levels."  Expressing his concern about interest-only loans, Greenspan added, "To the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace."

According to NPR's "All Things Considered," mortgage rates fell again today and stand at a 14 month low.  In the past, Greenspan has called that "a conundrum" because "falling interest rates have [historically] signaled looming problems."  Greenspan does not see that this time, according to NPR, because globalization is changing price structures, easing concerns of inflation. 

Interest rates at 14 month lows may sound good to some home buyers, but not everyone agrees.  According to Tom Ashbrook, host of NPR's nationally syndicated OnPointRadio, low interest rates may "portend real shocks down the road." 

Bill Wendel | 06:22 PM in Defensive Homebuying, In the News, Real Estate Bubble | Permalink


TrackBack URL for this entry:

Listed below are links to weblogs that reference Greenspan's "Interest Rate Conundrum":


NOTE: Your email address will not be published on this page with your comment. Followup to your comment will generally appear here. Occassionally the Real Estate Cafe may use your email address to followup with you directly however it is not shared or given to anyone else nor added to a RE Cafe mailing list.

I think that Greespan is wrong in this case, that we'll get much more than price stagnation. I think we'll probably see a decline in prices based on interest rate increases alone! I've written an article about this recently at: http://www.followsteph.com/News/Howinterestratescandrasti.html
which shows the graph of how interest rates can greatly affect the affordability prices of mortgages.

For example, if you want to keep a monthly payment of $1000/mth, and if interest rates climb up 2-3% from todays lows of 5% then you are looking at a 20-30% drop in mortgage affordability! In detail, if you have an interest rate of 5% and you can only afford $1000/mth mortgage payments, then you can afford a mortgage of up to $186,281.62. If interest rates climb to 7%, then this number drastically drops to $150,307.57, a $36k difference, or about a 20% drop in price!

Stephane Grenier

Posted by: Stephane Grenier | Jun 10, 2005 2:56:11 PM

Why would (LT) interest rates rise? Granted the Fed is indeed raising short-term rates...

But the 10-year note has essentially been flat for 3 years...

Global economic growth is slowing and very few industries have any sort of pricing power... So why would LT interest rates rise?

Posted by: kailuabruddah | Jun 13, 2005 12:34:41 PM

att;kailuabruddah December 7,2005

What ever the fed does I really do not care
even if the fed is increasing those short term rates to 8 or 9%.As long as Mr.Greenspan and so far he has listen to my request does not let those long term whether
5,10,or 30 years rates go up to this level,
on the contrary,I am one of those who appreciates it very much as I have 752 apartment Buildings which all their renewel
mortgages are due to be renegotiated starting with the fiscal year 2006..So It is I Who Mr.Alan greenspan is trying to satisfy,Yes me.And therefore,I take this opportunity to tell Mr. alan greenspan and
his successor>>>"THANK YOU VERY MUCH"""
What ever you decide to do,is ok for me but
please make sure to leave those long term
interest rates at the level of december 1,2005..Best regards..George Fandrum..
Email Address " [email protected]"

Posted by: george fandrum | Dec 7, 2005 10:34:47 AM

The comments to this entry are closed.