U.S. Federal Reserve Chairman Alan Greenspan said Tuesday that he did not foresee big price distortions developing in home prices and said Americans were handling their debts well.
Speaking to America's Community Bankers, Greenspan conceded there were concerns about "the exceptional run-up in home prices" but said hefty debt burdens seemed to be under control, provided that incomes and home prices did not tumble.
"A significant decline in consumer incomes or house prices could quickly alter the outlook," Greenspan said, adding: "Nonetheless, both scenarios appear unlikely in the quarters ahead."
The very size of the U.S. housing market shielded it from widespread price bubbles, he suggested.
"While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," Greenspan said.
Analysts said the Fed chief seemed to trying to soothe concerns about potential economic imbalances.
"Greenspan's trying to soften fears of a housing bubble just as he has tried to soften fears of higher energy prices or the growing current account deficit," said Josh Stiles, a bond strategist with IDEAGlobal in New York.
"There just doesn't seem to be that much that worries him," Stiles added.
Low rates a shield
Greenspan acknowledged there were "pockets of distress" among U.S. households, indicated by "persistently high" bankruptcy rates, but on balance Americans' finances "appear to be in reasonably good shape."
He said some of the increase in the ratio of household debts to incomes in recent years was not necessarily a sign of distress, since part of it resulted from more renters buying homes and gaining equity.
While average annual mortgage debt has grown at rates exceeding 12 percent for the past two years, "the financial obligations of homeowners have exhibited little change as a share of their income because mortgage rates have remained at historically low levels," Greenspan said.
Susan Stearns, vice-president of institutional foreign exchange sales for Bank of Montreal in New York, said Greenspan appeared to be allaying fears of a potential housing bubble. Policymakers in other countries, particularly Britain, have worried about the risk of a destabilizing bubble in home prices in recent years.
"He (Greenspan) thinks that the housing data that he has seen is reasonable given the scenario here. It projects a note of calm in a market that is poised for concern," Stearns said.
Greenspan said he did not think U.S. consumers were likely to come under stress even if interest rates were to keep rising. The Fed has raised U.S. official short-term interest rates three times this year, though longer-term rates such as those on mortgages remain low by historical standards.
"Altogether, even in a rising interest-rate environment, debt-service ratios at least for a while should rise only modestly," said Greenspan, who did not take any questions from the audience.