Real estate investments today carry the sort of "speculative imbalances . . . which could threaten the stability of the American economy," economist Alan Greenspan warned yesterday at congressional hearings called to observe the 50th anniversary of Wall Street's crash in 1929.
A sizable number of home purchasers "have taken on an inordinately large debt in the expectation that in a few years inflation in general and constantly skyrocketing housing prices . . . would bail them out of their temporarily precarious debt burden," Greenspan told the Joint Economic Committee.
The four-fifths of all Americans who have debts are allocating an average of 35 percent of all spendable income just to make loan payments, he said. And the average statistics mean that a substantial portion of households are allocating half their disposable money to debts.
A broad economic crisis could develop if the surge in home prices fails to continue as the home buyers have planned, said Greenspan, former chairman of the Council of Economic Advisers under President Ford.
Recent statistics have indicated housing prices are softening, and Greenspan said yesterday the upward pressure on house prices "should weaken."
A modest decline in home prices probably would have only a small impact on the overall economy, he added.
But sliding sales and rising interest rates could send housing prices down by 20 percent, 30 percent or more -- a possibility Greenspan rated as "surely quite low." In such an event, however, "a plunge in prices would wipe out much of the unrealized capital gains which homeowners currently assume is available in case of difficulties," he asserted.
Greenspan warned that these developments would catch many recent buyers with net losses and excessive debts burdens, followed by loan delinquencies, foreclosures and financial diffuculties for lenders and borrowers.
"In addition, homeowners probably would be forced to accept a sharp retrenchment in their day-to-day expenditures as they tried to pay off part of their existing debt burden. . . the cumulative impact of such problems would be far deeper than any recession that is currently envisioned," Greenspan declared.
Greenspan is not alone in expressing concern about soaring real estate prices. Some government officials have stated privately that they expect housing price increases to halt within a year and a real downturn to begin in several regions -- particularly in markets such as Washington, where inflation in house prices has been most pronounced.