This article appeared in Realtor Magazine: 

Greenspan: Dangers of Further Price Drops
Even with hopeful signs in the economy, afternoon panelists at the NATIONAL ASSOCIATION OF REALTORS®’ Real Estate Summit, “Advancing the U.S. Economy,” here today agreed that:

• Stabilizing housing prices is essential to a recovery.
• The federal government needs to inject great consumer protection into home lending.
• Financial industry reforms should address and protect against systemic risk from institutions deemed “too large to fail.”

Home prices are one of the biggest question marks in the economic recovery. How low can they go? Nationally, on average, prices have declined 30 percent. That’s been great for affordability, but it has been a blow to home owners who find themselves in a position of needing to sell while significantly underwater on their mortgages.

The Danger of Further Price Declines

To exacerbate the problem, increased inventory of unsold single-family homes continues to depress prices, said former Federal Reserve Chairman Alan Greenspan, whose keynote address led off an afternoon of speakers discussing the future of real estate finance.

If prices fall beyond another 5 percent or so, problems in the subprime and Alt-A categories will spill over into the conforming loan category, where defaults are still relatively low, Greenspan warned.

“After September 15—the date of Lehman was allowed to fail—equities fell off a cliff,” he said, losing $35 trillion in value. But in recent weeks, Greenspan said he has seen reasons for optimism.

Since March 9, he said, investors have added $10 trillion of value back into the global system. Real estate markets, he said, are at the beginning of a major liquidization of excess inventories.

“As a result, I expect, I hope, we’ll see stabilization,” Greenspan said. “While there are still great concerns, we’re beginning to see the seeds of bottoming, not in prices yet, but in sales.”

Asked about the future of Fannie Mae and Freddie Mac, Greenspan sounded the theme heard often here today. Organizations that grow “too large to fail” are a danger to the country’s economic health. During the boom, Fannie and Freddie became overlarge and overleveraged. To protect the “very important role of mortgage securitization,” they should be split into smaller organizations, he said. “I don’t think the existing structure is sustainable.”

Making Loans Understandable

Following Greenspan’s speech, personal finance writer Jane Bryant Quinn led a panel of residential and commercial real estate practitioners, academics, policy experts, and journalists in a discussion of how to restore the flow of capital to real estate and protect the future of real estate finance.

Panelists offered ideas for improving the short sale process, extending the tax credit to all buyers, and strengthening HUDs Hope for Homeowners program, which was intended to help owners restructure their loans but has served virtually no one. Dina El Boghdady, a real estate writer for The Washington Post, said she was encouraged by recent congressional action to improve the program. Proposals have been passed by both the House and Senates. A compromise bill could reach President Obama’s desk within weeks.

The panelists called for meaningful reforms to the real estate finance industry that will protect consumers from mortgage instruments they can’t understand.

Kathleen Hays, an anchor on Bloomberg Television, commended NAR for its leadership on the reform front and urged REALTORS® to contact their members of Congress in support of the Mortgage Reform and Anti-Predatory Lending Act (H.R. 1728). NAR President Charles McMillan testified before the House Financial Services Committee April 23 in support of the bill, which passed the House in early May.

—Stacey Moncrieff, REALTOR® Magazine