WHEN FED CHAIRMAN BEN BERNANKE TESTIFIED RECENTLY BEFORE CONGRESS, HE TOLD THEM THAT IF THEY WANTED TO PASS LEGISLATION TO HELP HOMEOWNERS IN DISTRESS THEY SHOULD NOT PLAN ON POSTPONING ACTION UNTIL NEXT APRIL, TO MAKE POINTS WITH VOTERS IN AN ELECTION YEAR.  THIS WILL BE ALL OVER IN A COUPLE OF MONTHS, HE SAID.  IT WAS A BRUTAL STATEMENT.  I AM NOT SURE MANY WHO HEARD HIM PAID A LOT OF ATTENTION OR BELIEVED HIM.  (I DID AND DO.)

THEY HAD GOTTEN USED TO ALAN GREENSPAN OVER THE YEARS AND FIND IT HARD TO BELIEVE THAT A FED CHAIRMAN CAN BE SO HARDHEARTED THAT HE IS WILLING TO ALLOW A MILLION FAMILIES OR SINGLE OWNERS (SOME ONE PERCENT OF THE TOTAL) TO LOSE THEIR HOME WHILE MARKETS FALL BACK TO PRE-MADNESS LEVELS.

I GUESS THEY HAVE FORGOTTEN WHAT IT WAS LIKE WHEN PAUL VOLCKER WAS FED CHAIRMAN (1979-1987).  THOUSANDS OF BUILDERS SENT PIECES OF TWO-BY-FOURS TO THE FED IN WASHINGTON TO PROTEST THE WAY VOLCKER WAS DRIVING THEM OUT OF BUSINESS AND KEEPING PEOPLE FROM BUYING HOMES.  HE DID NOT GIVE IN.  HE PROUDLY STACKED THEM INSIDE THE FED FOR ALL TO SEE.  HIS STERN STAND RESTORED COMMON SENSE TO HOUSING AND TO THE U.S. ECONOMY.  FOR THE NEXT SEVERAL YEARS HE AND RONALD REAGAN COMBINED TO BRING A POWERFUL BOOM.

I HAVE IN FRONT OF ME AS I TALK WITH YOU AN OFFICIAL CHART PORTRAYING SALES OF NEW ONE-FAMILY HOMES ACROSS THE COUNTRY (SEASONALLY ADJUSTED).  AS SOON AS YOU LAY EYES ON IT YOU HAVE TO BE STRUCK BY THE SIMPLICITY OF ITS MESSAGE.  For five long years, during the Clinton Administration, new home sales stayed very close to a rate of 800,000 per year.  That rate of new home construction and sales seemed to be just right to allow the housing industry as a whole to satisfy the need for homes in America.  (Existing homes account for most home sales.)  There are a certain number of homes lost each year due to fires and floods and they must be replaced.  Then there are new family formations and since Americans are living longer and continue to need housing, these new families must find a place to live.

But starting in 2001, Alan Greenspan decided to knock the fed funds rate down to the same level (1.00%) that had prevailed under Herbert Hoover in the 1930's.  That seemed to a lot of people and builders as if money was being given away.  And when mortgage lenders came up with some new kinds of mortgages - such as pay interest only, borrow more than the cost of a home to cover closing costs and fees, borrow by making up income and asset numbers with no one checking on them - a whole world of mortgage and housing fantasy opened up, especially on the West Coast.

The Federal Government chimed in with programs designed to get people on welfare to buy and own a home of their own.  The belief was that with home prices rising by 10% to 15% a year, a poor family could quickly build a nest egg of home equity and move into the middle class.  A small army of enablers appeared on the scene and encouraged, even solicited, people to jump into that housing market.  And it was not just low-income people without savings who were tempted.  Middle and upper-middle income families quickly came to believe that the bigger the house they bought and the bigger the mortgage they took out, the faster they would get rich.

Major homebuilders fed this fantasy by announcing price hikes on a regular basis.  Soon a whole host of people decided that owning one house did not give them enough opportunity to grow rich fast.  Why not buy two or three or five, maybe even eight homes.  Lenders were pleased to write these speculative mortgages and quickly sold them off to Wall Street, where they were bundled together and sold as bonds.  And that is where things really went crazy... or got creative, it was said.

As interest rates rose again, mortgage lenders sold people on the idea of buying far more home than they could afford.  They wrote mortgages with low teaser rates with clauses that allowed the lender to boost rates to 12% or more in a couple of years.  Wall Street then peddled bundled mortgages with 10% down loans.

Starting in early 2005 we were almost alone that this could not go on and would not go on.  We particularly warned builders to pull back and wait for an inevitable correction in sales and prices.  It was encouraging to see how many smaller builders, many of them dealing in local markets, who saw the signs of madness and stopped buildings homes except for those with a firm signed contract backed by a written okay from a bank saying that they would issue a mortgage as soon as the house was finished.  A very few BIG builders refused to even look at the handwriting on the wall.  They stepped up the pace of their new home construction, with the worst madness coming at the end of 2005.  That was also the end of Alan Greenspan's final term as Fed chairman.  He never was a man who chose to get in the way of a runaway boom.

He proved that in the dot-com boom when he did not stand in the way of banks lending investors money to buy shares after the market had roared upward by as much as 400% in a few years.  He always believed in allowing the free market to set its own standards and he indulged the housing market to the end of 2005.  He may, it is fair to add, have believed that his series of rate hikes in 2005 were enough to assure stability in the housing market.  But that was a fallacy.

Homeowners can deduct interest payments from their income tax forms and that made the posted rates a lot lower when all was said and done.  This was particularly true for higher income borrowers buying bigger homes with jumbo mortgages.  As some regional and national builders kept borrowing money to add more land to their inventory and willingly allowed speculators who planned to flip their homes to order a bigger and bigger percentage of their houses, they set themselves up for trouble.  And this year they have really experienced the troubles we foresaw.  (I said in the spring of 2005 that I could sees this time of troubles lasting two years.  Well we have gone beyond the two-year mark now.  What I did not foresee was the utter madness of some builders, mortgage lenders, politicians and homebuyers in the second half of 2005.

Between August 2001 and August 2005 alone the rate of new single family housing starts exploded upward from 1.286 million homes to 1.728 million homes.  That is a total of almost a half million extra homes a year being built.  And when you look at the four years of madness as a whole, it could be construed that a million surplus homes were built during that period.  They did not seem like surplus as the time.  But when the tide went out things became clearer.  Tens of thousands - even hundreds of thousands - of orders were cancelled.

Many of the would-be flippers walked away from homes they had bought, and since evidence now shows that 40% of orders in some markets were really speculative flippers, it became obvious that too many homes were being built than were needed by true buyers.  Wall Street believes that Bernanke will come in and repeat Greenspan's policies of cheap, plentiful money.  I do not.  He has made it plain that even recent reports of new home sales having collapsed by more than 40% this month in Seattle, Tucson and Baltimore are not apt to sway him.  He believes that some of the Wall Street financiers, some of the mortgage companies, and some of the builders are guilty of either bad judgment or outright fraud and should be allowed to suffer great pain, even bankruptcy.

As for homeowners, he sees the potential for some temporary assistance from FHA, Fannie Mae and Freddie Mac but has, as I said, warned Congress to act fast or miss the chance.  Housing must burn through the surplus of homes and only cutbacks in building can accomplish that.  So do not look for money to be pumped into builders to save them from such cutbacks.  More next week.  Adrian Van Eck.

Gail Gladstone, Long Island Realtor