Greenspan Sees Bubbles in Housing

The comments were Greenspan's most detailed description yet of risks in the booming real estate market, and reflected the Fed's growing concern about the need to tighten mortgage lending standards.

Greenspan's remarks, during a question-and-answer session after a speech in New York, were reminiscent of his statement in 1996 that the then-hot stock market was afflicted with "irrational exuberance."

The Fed chief said Friday that he didn't see a national housing bubble and that the economy was not at risk, an assertion he had also made in February.

"But it's not hard to see that there are a lot of local bubbles," he said Friday, without specifying these local markets. Greenspan said price surges might "simmer down" as housing became less affordable.

"It's pretty clear that it's an unsustainable underlying pattern," the Fed chief said. "People are reaching to be able to pay the prices to be able to move into a home."

The central banker went beyond his comments in February by describing how he saw "very significant acceleration" in the turnover of U.S. homes, partly because of purchases of second homes. He said speculation in both the housing and mortgage markets had accelerated.

Greenspan said buyers were using riskier financing techniques, such as "interest only" loans, to squeeze into houses. Adjustable-rate and interest-only mortgages accounted for nearly two-thirds of new loans in the second half of 2004, according to the Mortgage Bankers Assn.

In California, home prices continue to rise at a double-digit pace. Last month, the median price paid for a house or condominium in the state rose 17.5% on a year-over-year basis to $424,000, according to DataQuick Information Systems.

Some analysts, agreeing with Greenspan that there is not a national housing bubble, contend that hot regional markets such as Southern California and south Florida have developed into localized bubbles because of sharp price increases that have outpaced the rise in incomes.

"Affordability is a serious issue," said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange. "The fact is that more people are trying to buy more housing than their incomes can justify."