Sign of housing-price stability bright spot

It is certain that U.S. gross domestic product will be down sharply in the fourth quarter, but hard-hit housing prices may start to stabilize in the first half of next year, former U.S. Federal Reserve chairman Alan Greenspan said Friday.

"There's no question gross domestic product in the United States for the fourth quarter is going to be down significantly,'' he told a business audience in Toronto.

"It's clear, just looking at the trend in the monthly gross domestic product, it's sliding at an over three per cent annual rate, and indeed the early data for October suggest that it's even more severe than that,'' he said.

"We know we're going down, and there's very little we can do about it.''

The U.S. economy shrank 0.3 per cent in the third quarter, the sharpest contraction in seven years,

In a wide-ranging question and answer session, the former Fed chief also said that U.S. housing prices could fall another five to 10 percentage points before stabilizing sometime in the first half of 2009.

"The rate of [single-family house] liquidation is apparently picking up rather aggressively, and it's that which will ultimately stabilize prices, not immediately but sometime in the first half of next year,'' Greenspan said.

This, in turn, will allow financial institutions to better price their housing-related assets, he noted.

Greenspan said he is closely watching the U.S. housing market, overnight bank lending rates and global stock markets for insight into the economic recovery.

While government intervention in the financial system has been necessary, he said similar efforts should not be repeated in non-financial industries.

"It's important that we not replicate in the non-financial area the type of subsidization that we, of necessity, were required to do to stabilize the financial system, which has at its root the fundamentals of systemic risk,'' Greenspan said.

Individual industries do not have that same risk, he added.

If the "appropriate use'' of sovereign credit can stabilize the financial system and stock markets bottom, then people will start to seek more risky investments, he said.

The current stock-market pattern has "all the characteristics of a bottom'' but that may not be the case, he said.

"It may just be another stage before you go down again.

"I'm not going to forecast where we're going, because I frankly don't have a clue.''

(prepared by Lynne Oliver/Vancouver Province)