Greenspan veranderde verwachte rent-to-price ratio 2004

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

De heer Greenspan veranderde de verwachtingen 'om de discussie in de
hand te houden' in 2004!!!

Met andere woorden 'he cooked the books' ;)

Groet / Cees

http://www.huffingtonpost.com/2010/05/03/greenspan-wanted-housing_n_560965.html
As top Federal Reserve officials debated whether there was a housing
bubble and what to do about it, then-Chairman Alan Greenspan argued that
the dissent should be kept secret so that the Fed wouldn't lose control
of the debate to people less well-informed than themselves.

"We run the risk, by laying out the pros and cons of a particular
argument, of inducing people to join in on the debate, and in this
regard it is possible to lose control of a process that only we fully
understand," Greenspan said, according to the transcripts of a March
2004 meeting.

At the same meeting, a Federal Reserve bank president from Atlanta, Jack
Guynn, warned that "a number of folks are expressing growing concern
about potential overbuilding and worrisome speculation in the real
estate markets, especially in Florida. Entire condo projects and upscale
residential lots are being pre-sold before any construction, with buyers
freely admitting that they have no intention of occupying the units or
building on the land but rather are counting on 'flipping' the
properties--selling them quickly at higher prices."

Had Guynn's warning been heeded and the housing market cooled, the
financial collapse of 2008 could have been avoided. But his comment was
kept secret until Friday, when the central bank released the transcripts
of Federal Open Market Committee meetings for 2004 and CalculatedRisk
spotted it. The transcripts for 2005 to the present are still secret.

Fed Discussed Possible Housing Bubble in 2004
http://www.calculatedriskblog.com/2010/05/fed-discussed-possible-housing-bubble.html
by CalculatedRisk on 5/01/2010 08:53:00 PM

The Fed released the transcripts for the 2004 FOMC meeting this week.
There definitely was some mention of a possible housing bubble, but
little discussion.

 From June 30, 2004:

Fed Rent Price Ratio June 2004 Click on graph for larger image in new
window.

This graph shows the Fed estimate of the rent-to-price ratio in June
2004. Usually this is drawn inverted (Price-to-rent). And this was after
the Fed made some technical adjustments - otherwise, in the words of a
Fed researcher, the graph would "have looked more alarming".

MR. FERGUSON [Roger Ferguson, Fed Vice Chairman in 2004]: The other
question I have deals with chart 3, on housing prices. My question is
about the footnote, which says that the rent–price ratio is adjusted for
biases in the trends of both rents and prices. Is that where you pick up
demographics and lifecycle factors? What are these biases in the trends,
and how does one think about changing demographics and the relative
attractiveness of owning a home versus renting? Give me some sense of
whether or not the shape of the curve that you show here is likely to
reverse, as you imply, or likely to stay relatively low.

MR. OLINER [Stephen Oliner, Fed associate research director]: The biases
referred to in that footnote were really technical biases in the
construction of the two measures shown here, the rent measure and the
price measure. Had we not adjusted for them, the rent-to-price ratio
would have been much lower at the end point. So it would have looked
more alarming. In part we think the published data have some technical
problems that need to be taken care of before this analysis can be done
in a way that is meaningful. With regard to the question of owning
versus renting, it depends to some extent on what is happening to
interest rates because that changes that calculation at the margin. So
it’s really important to plot any kind of valuation measure relative to
an opportunity cost. Just showing the rent-to-price ratio I think would
have been somewhat misleading; it’s really that gap that we think is the
meaningful measure of valuation. And it looks somewhat rich, taking
account of the fact that interest rates are relatively low and income
growth has been relatively strong. I don’t want to leave the impression
that we think there’s a huge housing bubble. We believe a lot of the
rise in house prices is rooted in fundamentals. But even after you
account for the fundamentals, there’s a part of the increase that is
hard to explain.

And a couple of comments from the March 2004 meeting:

MR. GUYNN [Atlanta Fed President]: We keep looking to our directors and
other contacts for indications of imbalances and pricing pressures that
they might see developing, and we’ve begun to get hints of both. A
number of folks are expressing growing concern about potential
overbuilding and worrisome speculation in the real estate markets,
especially in Florida. Entire condo projects and upscale residential
lots are being pre-sold before any construction, with buyers freely
admitting that they have no intention of occupying the units or building
on the land but rather are counting on “flipping” the properties—selling
them quickly at higher prices.
...
MR. KOHN [Fed Governor]: House prices are elevated relative to rents—and
will look even more so when rates begin to rise—but are more likely to
correct by rising less rapidly than by crashing. Eggs will get broken
when rates begin to rise, but the capital in most intermediaries is
high, and the system is resilient.

CR: Rampant speculation, an "alarming" price-to-rent chart, prices
rising faster than explained by fundamentals, "eggs will be broken" -
and this was in 2004. And Kohn was wrong - the system wasn't "resilient".
Posted by CalculatedRisk on 5/01/2010 08:53:00 PM

**********
Dit bericht is verzonden via de informele D66 discussielijst (D66 at nic.surfnet.nl).
Aanmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SUBSCRIBE D66 uwvoornaam uwachternaam
Afmelden: stuur een email naar LISTSERV at nic.surfnet.nl met in het tekstveld alleen: SIGNOFF D66
Het on-line archief is te vinden op: http://listserv.surfnet.nl/archives/d66.html
**********