The worst of the U.S. economic adjustment to the housing slowdown is in the past, although housing starts and prices likely still have room to fall, former U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday.
"The worst is behind us," he told a C$400-a-plate luncheon audience in Toronto via video conference, according to a source who was in attendance.
Greenspan had been expected to deliver his speech in person, but his flight was canceled due to snowstorms across much of eastern Canada and the United States.
There are some important points to remember here.
1.) As a former Central Banker, Greenspan is playing the, "I'm the voice of reason" card. He probably doesn't view his position as someone who should issue warnings of concerns. If memory serves, only did that one with his "irrational exuberance" statement in the mid-1990s.
2.) I disagree strongly with Greenspan's statement. Over the last two months, we've seen two waves of sub-prime mortgage (SPM) defaults and bankruptcies. The first included Ownit Mortgage which at the time was the 11th largest SPM lender. The second started at the beginning of this week when HSBC announced it was increasing its loan loss reserve and NEW said it was restating earnings for the last year and was reporting a loss for the latest quarter. UBS securities has said the 2006 SP mortgages were going into default at a record pace. The same article notes that delinquencies are above 2000 levels. That means delinquencies in an economic expansion are higher than delinquencies during the last contraction. Housing vacancies are over 2% -- the highest ever on record. None of these factors indicate housing is at a bottom.
I predicted a recession in 4Q 2006 or 1Q 2007 based on the assumption the housing market's problems would bleed into consumer spending. That assumption was wrong as housing problems have been contained so far. But it also looks like we have a long way to go before housing bottoms.