More House Price Declines Could Fuel Contraction

Washington, DC, Aug. 2, 2010--Former Federal Reserve Chairman Alan Greenspan warned that the economy might contract again if home prices continue to decline.

“We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession,” Greenspan said in an interview on NBC’s “Meet the Press” broadcast Sunday.

Asked if another economic contraction was possible, Greenspan said, “It is possible if home prices go down. Home prices, as best we can judge, have really flattened out in the last year.”

“If home prices stay stable, then I think we will skirt the worst of the housing problem,” Greenspan said. “But right under this current price level, mainly 5, 7 or 8 percent below, is a very large block of mortgages, which are under water, so to speak, or could be under water. And that would induce a major increase in foreclosures, foreclosures would feed on the weakness in prices, and it would create a problem.”