August 2, 2005 BY ANDREW WARD and ALISON FITZGERALD BLOOMBERG NEWS
Federal Reserve Chairman Alan Greenspan isn't worried about the hot U.S. housing market so he isn't cooling it off by raising interest rates faster.
Worry, say Wall Street economists including David Rosenberg of Merrill Lynch & Co. and Stephen Roach of Morgan Stanley.
The economists say the Fed must act for a simple reason: The United States has become so dependent on real estate and construction to fuel growth and jobs that an eventual, wrenching correction has the potential to sink the entire economy.
"Act now and cut off the pinky, or wait till later and risk slicing off the entire hand," Rosenberg said last week. "Either way it hurts, but you can still type with nine fingers."
Greenspan disagrees. While he said July 21 that home prices might be unsustainable in some regions of the United States, the Federal Open Market Committee he leads decided in June that it wouldn't use interest rates to address "possible mispricing," according to minutes of the meeting made public July 21.
Rosenberg credits housing with 40% of the 2.3 million jobs added since the 2001 recession. In a report to clients last week, Lehman Brothers Inc. said related industries accounted for more than a third of the nation's economic growth over the four quarters that ended in March. Fed data show appreciation helped add $5.2 trillion to consumers' balance sheets during the current expansion, or 68% of all wealth creation.
Greenspan told Congress in testimony July 20 and 21 that there is "froth in some local markets," repeating a phrase he used in May to describe the run-up in housing prices. While there's a risk of disastrous results for individuals with mortgages that depend on appreciation, he said, it's unlikely that localized price declines would hurt the national economy.
Rosenberg says it will take at least three more quarter-point rate increases from the current 3.25% to slow home-price gains to their long-term average.
Roach recommends the Fed use its bully pulpit as a bank regulator to tighten lending practices. "We're in a dangerous place," he said.
Greenspan is right that concerns about a nationwide bubble might be overstated, Neal Soss, chief economist at Credit Suisse First Boston in New York, said in an interview.
The median U.S. home price surged 51% to $219,000 in June from the beginning of the expansion in November 2001, according to the National Association of Realtors. The 15% jump from June 2004 was the biggest 12-month gain since 1980, and evidence is mounting that more investors are speculating in real estate, adding to volatility.
Consumers extracted $1.62 trillion from their homes through equity loans since 2001 and spent as much as half of that, Jan Hatzius, a senior economist at Goldman, Sachs & Co. in New York, said in an interview.
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