LONDON (Reuters) - The housing market has a long way to go before stabilizing after the subprime crisis, spelling bad news for consumers in the world’s biggest economy, former Federal Reserve chief Alan Greenspan said on Monday.
Greenspan, who has been outspoken throughout the credit crunch, said more house price declines were likely given a surfeit of supply but pointed to signs the lending crisis could be coming to end as demand for more risky assets grows.
However, he warned any speculative market fever must be allowed to run its course to enable a full recovery.
“As in similar situations of inventory excess, I would expect home price declines to continue until the rate of inventory liquidation reaches its peak,” Greenspan told an audience at Reuters in London.
“There is little relevant American history to guide us in judging the ultimate extent of home price decline or the timing of a new price recovery, or by extension, the economic impact on the rest of our trading partners.”
The U.S. housing market remains extremely fragile after a crisis in low-end mortgage borrowing spread fear of a global economic slowdown and put a squeeze on lending conditions.
The Fed has slashed U.S. interest rates by half a percentage point to try and stabilize markets and encourage banks to increase their lending to each other.
But official data shows a U.S. housing recovery is some way off with new home sales falling more than expected in August to notch their slowest rate in seven years and prices recording their sharpest annual fall since 1970.
Analysts said those figures largely reflected conditions before the mid-August market turmoil set in.
“All that I conclude is that the process of inventory adjustment has just started and we have a long way to go before residential housing and mortgage markets stabilize in the U.S,” Greenspan said.
Greenspan said likely victims of sustained weakness in the housing market would include the consumer and, consequently, the world’s biggest economy.
“Recent declines in home prices are already eating into home equities and unless stock prices resume their pace of increase of earlier this year, U.S. consumer spending and GDP will be under pressure from declining household wealth,” he said.
But he said signs were emerging the credit crisis could be coming to an end.
“To be sure, lenders in recent days have been reaching out for longer term, lesser quality assets and that is a good sign,” he said. “Is this August-September credit crisis about to be over? Possibly.”
Additional reporting by Michael Taylor