The conundrum of low long-term bond yields is contributing to frothy real estate markets around the U.S., and the situation is being exacerbated by exotic adjustable rate mortgages and interest-only loans, Alan Greenspan told Congress Thursday.
In prepared remarks, the
chairman stuck to his recent script on the economy, saying the deceleration of spring doesn't presage a more serious slowdown. Greenspan noted budding inflationary pressures in labor markets, where productivity growth is slowing.
"At the same time, evidence of increased pricing power can be gleaned from the profit margins of nonfinancial businesses, which have continued to press higher even outside the energy sector," Greenspan said. "Whether that rise in unit costs will feed into the core price level or will be absorbed by a fall in profit margins remains an open question."
Most of Greenspan's address dealt with the housing market, which he characterized as one of the "imbalances" policymakers have been confronting for a year.
"There can be little doubt that exceptionally low interest rates on 10-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices," Greenspan told the Joint Economic Committee.
"Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels," he said.
Greenspan noted that structural checks exist against rampant speculation in real estate, particularly when owners live in their houses. More troubling is a recent trend toward purchases of second homes.
"Transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences -- an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past," Greenspan said.
Newfangled financing instruments could make the situation worse, Greenspan said.
"The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern," he said. "To be sure, these financing vehicles have their appropriate uses. But 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."