Here’s an article by Michael Steinberg at Click Broker disagreeing with Greenspan’s argument about financial institutions stabilizing when equity in homes and mortgage related assets can be accurately priced. Michael argues that financial institutions will stabilize in advance of price stabilization. – Ilene 
Greenspan’s Meaningless Statistics
The Wall Street Journal “Greenspan Sees Bottom In Housing, Criticizes Bailout” shows just how stubborn the former Federal Reserve chairman has become. Endlessly out to defend his record, he even wrote a new chapter for his book. The paperback version will be out next month.
The Journal reports Greenspan studying endless statistics, charts and graphs: 800K vacant homes, the quarterly S&P Case Shiller National Home Price Index, and his old time favorite “owners’ equivalent rent”. At a certain price it will be rational to own a home, according to Greenspan. When the market finds that rational price, equilibrium will be achieved and the excess inventory will be used up.
Once we have price discovery, we will know home equity value and mortgage related assets can then be accurately priced. At that point financial institutions will stabilize. Doesn’t Greenspan sound rational? I wrote "Foreclosures will Moderate as Home Prices Continue to Fall" disagreeing; financial institutions will stabilize well in advance of price stabilization.
Greenspan believes that supply and demand will be in balance with a bottoming in the first half of 2009. But, he qualifies that does not mean home prices stop falling. He just means that the supply and demand will be in balance. Greenspan enforces his argument by relating homes to commodities, and reminding us that he traded copper 50 years ago.
Why do I say that Greenspan’s analysis is meaningless? First, homes do not behave like commodities. They are not as fungible as one pound of copper is to another, and industrial markets are different than consumer markets. Second, statics do not take into account the increased cost of operating a home, stagnant wages of the last decade, tighter lending standards, and weaker consumer balance sheets. Third, statics do not take into account that much of the overstock of housing created during the boom is not consistent with current lifestyles. McMansions built during the boom are now about as valuable as SUVs. Therefore, many vacant homes are either worthless or might take years to sell.
Once in a while anecdotal evidence is worth more than statistics. In this case, Greenspan should ask if his conclusion is seated in reality.
I cannot leave Greenspan without citing his exact quotes on Fannie Mae (FNM) and Freddie Mac (FRE), via the Journal:
"They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted — with necessary taxpayer support to make them financially viable — as five or 10 individual privately held units," which the government would eventually auction off to private investors, he said.
I talked about Greenspan’s relationship with those who would benefit from his remarks in "Paulson tops Gross, Greenspan and Ackman in the Mortgage Battle". It still baffles me how the government could entice a new set of GSE investors after they nationalized and wiped out the first set. Greenspan has either sold out the national interest for personal gain or has gone completely senile.
Disclosure: Author is long FNM and FRE.
