HOW-ZING Exuberance 2005

Sir Alan Greenspan had some reassuring words today for the homeowners that have fully extracted the equity from their homes & for bankers who have willingly allowed them to use that cash to live the 'good life'. Congressman from both sides of the aisle questioned the maestro about the level of housing prices and voiced their concerns about the housing price run-up. In his usual fashion, Fed Chairman Greenspan spoke from both sides of his mouth without much in the way of explanation or coherence. What he did say, that was understandable, unusually clear, and could be of importance was the following.

"Some U.S. communities may experience a plunge in home prices after years of gains, but there does not appear to be any national home value collapse ahead, Federal Reserve Chairman Alan Greenspan said on Thursday. "I think we are running into certain problems in certain localized areas. We do have certain characteristics of bubbles in certain areas, but not as best as I can judge, nationwide," Greenspan said in response to questions from members of the House Financial Services Committee. The Fed chair said some decline in house prices on the national level is possible, but should not cause major problems because many homeowners have substantial home equity after a period of rising values.

The use of the word 'plunge' and 'collapse' in the statement did not seem to bother most. I encourage you to re-read the statement, as he clearly states, unusual as that may be for him, that a plunge in home prices may be experienced in some communities. He also states that there does not appear to be any national home value collapse ahead, even though he does acknowledge that he believes that we do have certain characteristics of bubbles in certain areas, but not as best he can judge nationwide. That should be comforting to most, but pretty worrisome for the homeowners in the so called localized areas. Finally, the certain problems he vaguely refers to could have been specified by saying that values are too high and speculative activity is rampant setting the stage for a serious correction in home values...of course that would be locally, not nationally.

The problem may be localized, but it is localized in some very large and important areas like South/Central Florida, Las Vegas, Nevada, Southern California, New York/New Jersey and surrounding areas, Washington/Maryland/Virginia areas, many areas in Colorado, Suburbs of Chicago, North Carolina suburbs, some areas in Texas. If housing prices plunge in these areas, it won't bode well for surrounding communities that have grown around them due to the prosperity of housing in these areas...can you see where this is leading?!

What Sir Greenspan failed to point out is the fact that most, if not all, of the "substantial home equity" has been EXTRACTED from those homes and has been used (spent) by the lucky homeowners to upgrade kitchens & bathrooms, buy new cars, send children to college, go on vacations, buy plasma televisions, iPods, and whatever else the profligate American consumer has wanted to purchase. Or to buy 2nd, 3rd, & 4th homes as investments or vacation homes, thus "parlaying" the investment in their primary residence.

And while their monthly payments may have been reduced, especially if they got a teaser rate refi or an ARM, the equitythat they pulled is most likely gone.

Thus, in the unfortunate communities, a.k.a localized areas, that may experience a PLUNGE in home prices, those unlucky and over stretched homeowners will need to figure out what to do to keep up with the Jones and the rest of their unlucky neighbors. The banks that have lent those happy go lucky folks all that money may also have to deal with the fallout from the plunge in values, as they are the very source of the capital that helped to pump up the bubbles in those certain areas.

Hopefully you are in one of the more fortunate communities, or less fortunate depending on how you view it, that has only experienced slight increases in home equity. Then your drop in value will be small, and not a plunge. And since you didn't get the big move up and weren't able to refinance and take out big bucks to redo your home and buy lots of new toys, you won't have it so bad during the downturn in home prices.

How come I don't think that makes you feel any better?