Federal Reserve chairman Alan Greenspan warned today of "speculative fervor" in some regional US housing markets, but said any fall in home prices was unlikely to have a broad impact on the economy.
In prepared testimony to Congress, Mr Greenspan said the Fed is keeping close watch on worldwide trends in savings and investment, which officials say have helped push down long-term interest rates, including mortgages.
"Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor," Mr Greenspan said.
Though he noted the US economy had weathered housing booms before without experiencing "significant" drops in the national level of home prices, Mr Greenspan said he could not rule out declines in value, especially in some local markets.
But any fall in prices would likely be softened by nationwide banking and by the buying and selling of mortgages among financial institutions, he said.
"Moreover, a decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of home owners have built up substantial equity in their homes despite large mortgage-market-financed withdrawals of home equity in recent years," Mr Greenspan said.
The Fed chief said the trend in mortgage rates - which are lower now than they were a year ago - is influenced by global trends in savings and investment and that the Fed is studying the phenomenon of low long-term rates.
"We at the Federal Reserve will be closely monitoring the path of this global development few, if any, have previously experienced," he said. While US investment has strengthened, it remains tepid in Europe, he said. If investment were to pick up around the world, long-term interest rates would presumably rise.
"Moreover, with term premiums at historical lows, further downward pressure on long-term rates from this source is unlikely," Mr Greenspan said. Mr Greenspan's comments come as the Fed increasingly raises concerns about rising US home values and spotlights the paradox of persistently low long-term interest rates in spite of the Fed's year-long campaign to raise short-term rates.
In February, Mr Greenspan called stubbornly low long-term rates, which are viewed as a major factor behind the housing boom, a "conundrum." Mr Greenspan renewed his warning that exotic mortgages, such as interest-only loans and adjustable rate mortgages - which have helped buyers purchase homes that would otherwise be unaffordable - could be adding pressures to the housing market.