Demographic trends are threatening to turn against the mortgage industry, meaning banks and thrifts will have to work harder to increase their business in coming years, Federal Reserve Chairman Alan Greenspan said Tuesday.

Addressing a conference hosted by America's Community Bankers, Mr. Greenspan pointed to expectations that new household formation, a key economic variable, has peaked. For mortgage lenders, which are already grappling with a shorter-term headache from a recent increase in interest rates, the longer-term shift carries deep implications for the industry and the U.S. economy.

The Fed chief did not go into detail, nor did he directly address the topics of interest rates or monetary policy in his address. But a slackening in new household formations and home construction would dramatically affect the economy. Construction is among the major business sectors least subject to the whims of globalization, and the formation of new households creates a huge ripple effect through the purchase of appliances and other products.

"The simple arithmetic of our population growth," Mr. Greenspan said, dictates that the mortgage market in the next century "is almost certain to become increasingly dedicated to existing-home purchases and refinancing."

The reason, he said, is that the rate of increase of both the U.S. population and the number of new households formed appears "destined to slow in coming years." That means existing-home sales will continue to increase, at least in relative terms, "though perhaps at a declining rate of increase."

The trend is already well under way, he noted. During the past five years, mortgages extended on new homes averaged about $140 billion annually and accounted for only about 16% of total mortgage originations on single-family homes, compared with more than 40% three decades ago.

"Almost surely, three decades hence, new-home extensions will be even lower as a share of the total market than they have been in recent years," Mr. Greenspan said.

Existing-home sales reflect the turnover of current housing stock, which in turn parallels the level of population and number of households, while sales of new homes generally tend to reflect growth of population and increase in households, he stressed.

"Short of a significant acceleration in immigration or a remarkable surge in the birth rate, few demographers would project a continuing rise in the rate of population growth," he said.

On the other hand, Mr. Greenspan noted that sales of new homes do not generate capital gains financed through the mortgage market, while sales of existing homes "almost always do." The Fed estimates that over the past five years, the average capital gain on the sale of an existing home, net of transaction costs, was more than $25,000.

The conversion of such home equity to "unencumbered cash" is a big driver of overall consumer demand, he noted. Most economists say consumer demand accounts for more than two-thirds of all economic activity.

One area he identified as a potential growth source was young buyers. Mr. Greenspan said home ownership among people aged 25 to 29 years has risen to 36%, from 33% over the past several years, but pointed out that in the early 1970s, the ownership rate for this age group was 44%.

"Putting today's youth on a higher ownership trajectory would be in the best interests of both your industry and the country," he said at the conference.

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