Greenspan's Conundrum

Analysts are wringing their hands over Alan Greenspan's conundrum: long-term interest rates failing to go up as the Federal Reserve raises short-term rates. Historically, a narrowing gap between long-term and short-term rates has pointed to an economic slowdown, and, in fact, a cooling might be in the cards. But a slowdown will impact home sales little. In fact, the housing market is poised for another record year.

The Fed is expected to raise it's federal funds rate at least two or three more times this year to about 3.75 percent. But bond investors, betting on a slower economy in the months ahead, think the Fed will pause in it's rate hikes by year's end, keeping long-term rates down. That will help housing.

I expect the 30-year fixed-rate mortgage to reach on 6.1 percent in the fourth quarter of this year, up from about 5.6 percent in early June, and rise modestly to 6.5 percent by the end of next year.

These continuing low rates will fuel already robust housing markets. I expect 2005 existing-home sales to reach 6.89 million, up 1.6 percent, and new-home sales to reach 1.24 million, up 3.2 percent.

Thanks to first-time and move-up buyers taking advantage of the favorable climate, price appreciation will remain strong, although cooler than in 2004. I expect the national median existing home price to rise 8.8 percent, down from 9.3 percent last year, and the national median new home price to rise 5.7 percent, down from 13.3 percent.

It's a good guess that Greenspan's conundrum is fueling the "froth" he's been seeing in the markets. That froth is the buoyant but not quite bubbling prices homes have been attracting in many markets. This dynamic certainly bears careful watching, especially as housing attracts short-term speculation.

But froth isn't always a bad thing. It helps keep home sales and the economy humming, even as some major economic indicators - job growth, retail sales struggle to maintain traction. And it gives you something cool to contemplate as you sit by the pool this summer.

Lereah is senior vice president and chief economist for the National Association of Realtors.