When Greenspan finishes his term as Fed chief, I am one person who surely will miss his succinct use of language to make a point. The use of the term irrational exuberance to explain the dotcom bubble, in hindsight, was right on the money. In discussing the current housing boom, he has used the word froth to discuss the relatively exotic mortgages which are of particular concern. While there are no predictions of a dotcom era style bust in real estate, the fact that 20% of new mortgages in 2005 are interest-only, up from 5% in 2003 is the froth of which Greenspan speaks. Consider a 10% drop in home prices for a moment. With a 10% down payment and an interest-only ARM, all equity in the home evaporates, and monthly payments eventually will rise with no principal reduction, because interest rates are rising. Does this sound just a bit frothy or even speculative?
The point is to always remember the cyclical nature of the economy, the stock market, the housing market and life in general. In the economic cycle, we are in the middle of the expansion phase, and within this phase, there are ups and downs. The market will rise and fall during this part of the cycle, but the...
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