WASHINGTON, Sept 26: US Federal Reserve chairman Alan Greenspan warned on Monday that consumer spending could take a hit from a rise in interest rates because so many consumers are tapping their homes for equity.
In a speech to the American Bankers Association, Greenspan said it is “an open question” what the impact of higher mortgage rates or any drop in home prices would have on the economy.
Consumer spending would fall as homeowners would not be able to finance spending from the rise in their home’s value, but the low personal savings rate would rise and the US trade deficit would shrink, Greenspan said.
The vast majority of homeowners have a sizable equity cushion to absorb a potential decline in house prices, he said. “That said, the situation clearly will require our ongoing scrutiny in the period ahead, lest more adverse trends emerge,” he said.
Greenspan repeated his view that the US property market has shown “signs of froth” in some markets “where home prices seem to have risen to unsustainable levels.”
He added, “It is still too early to judge whether the froth will become evident on a widening geographic scale, or whether recent indications of some easing of speculative pressures signal the onset of a moderating trend.”—AFP
