The U.S. Census Bureau has reported that the housing industry now represents over 25 percent of investment dollars and a 5 percent value in the overall economy, as well as over 15 percent of the gross domestic product.

That should be a good thing, but not for those who are worried that housing is too hot, and needs to be slowed down.

Back in July, 2005, Alan Greenspan, who will retire from the Federal Reserve by next year, began to introduce fear into the housing market. He famously told Congress that there was some "froth" in some local markets, and at the Federal Open Market Committee meeting, he suggested that housing prices were "unsustainable," and that the Fed wouldn't use interest rates to address "possible mispricing."

He followed up with remarks at a Federal Reserve symposium held in Jackson Hole in August where he reiterated risk in housing, taking aim at housing speculators.

"The lowered risk premiums -- the apparent consequence of a long period of economic stability -- coupled with greater productivity growth have propelled asset prices higher," says Greenspan. "The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions. The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions."

But he warned that an increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk.

"Such an increase in market value is too often viewed by market participants as structural and permanent," he intoned. "To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices."

"This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums," he said.

Translation -- the economy might suddenly smack quick-buck investors who are highly leveraged in real estate.

By October, the Fed had raised short-term interest rates no less than nine times in a year. While short-term rates aren't tied to long term rates, they do have an impact on long-term investments that could be impacted by inflation such as mortgage interest rates. In an inflationary environment, lenders will raise interest rates to offset higher monetary costs down the road.

The conundrum here is that it's not the Fed's job to control asset prices, but it does have a role in balancing the economy should it fall off the tightrope.

But, not everyone agrees that Greenspan is doing the economy any favors by capping the housing industry's gains.

Investment U founder and adjunct faculty member of Columbia University Dr. Mark Skousen, calls Greenspan a "threat."

"Alan Greenspan seems bent on hiking short-term interest rates. The problem is, long-term interest rates haven't been rising with his hikes in short rates. So that actually puts the economy in a dangerous position. The financial markets expect Greenspan to raise short-term interest rates to 3.75 percent by the end of this year. Meanwhile, long-term interest rates right now (as measured by the 10-year Treasury bond) are below 4 percent. So if Greenspan goes through with raising rates as promised, then the spread between long-term and short-term interest rates will obviously be very tight."

He says, "The lesson from history is: whenever short-term interest rates rise above long-term interest rates, the economy goes into recession. In fact, for the last 40 years, whenever short-term rates rose above long-term rates, the economy has dipped into recession."

In 1990 and in 2000, short-rates just briefly crossed below zero, triggering a recession, and recessions have a huge impact on real estate and new home prices. "Recessions are very bad for new home prices. Really, over the last 40 years, the only times that new home prices have fallen are in or around recessions.

New home prices have taken it on the chin in most of the past recessions. After a big rise in home prices in recent years, a fall in home prices in inflation-adjusted terms seems pretty certain, says Dr. Skousen. "And a double-digit percentage fall isn't out of the question at all. Based on the data, the big threat is probably Alan Greenspan hiking rates too quickly, which could inadvertently cause a recession."

He instructs, "Recessions follow booms. There's no way around it. New home prices (adjusted for inflation) have a hard time avoiding the wrath of recession. New real estate home prices could keep going up in the short term.

"But a return to "normal," where the median family can afford the median home, will no doubt return, ending the bubble's run. To get to normal, either household incomes have to rise significantly or home prices have to fall.

"Which do you think is more likely?"

Published: November 25, 2005

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.