Former Federal Reserve chairman Alan Greenspan offered a bit of optimism about the housing market in an interview this week with David Wessel of the Wall Street Journal.

Greenspan said that he expects housing prices to begin to stabilize in the first half of 2009 although they could continue to drift lower for quite some time thereafter, even after essentially reaching bottom.

An end to the decline in house prices matters not only to American homeowners but, he said, is "a necessary condition for an end to the current global financial crisis."

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet -- and hence banks' capital -- until then."

The former Chairman, a rapt student of the housing sector, bases his prediction on the supply of vacant, single-family homes for sale ' both new homes and existing ones owned by investors and foreclosing lenders ' and a comparison of the current prices of houses with the government's estimate of when it is cheaper to own than to rent.

'It's the imbalance of supply and demand which causes prices to go down, but it is ultimately the valuation of the commodity'which tells you where the bottom is.' The current excess supply of homes which he places at 800,000 units above normal will stabilize at some price level where investors will be willing to hold inventory and the excess will no longer act to depress prices.

He argues that the government should avoid tax or other policies that encourage more home building which would delay reaching that bottom. He also points out that the number of new American households forming each year is about 800,000, exactly where he pegs excess housing inventory and that one third are immigrants and about 150,000 of those are skilled workers who earn enough to purchase a home. While admitting political difficulties in doing so, he suggests a major expansion in quotas for skilled immigrants.

Greenspan, however, is not changing his long-standing belief that Freddie Mac and Fannie Mae represent the root of all evil. He acknowledges that the collapse in home prices was and is a major threat to the stability of the two government sponsored enterprises and that government backstopping was unavoidable given the widespread belief that the GSEs have always been backed by the full faith and credit of the U.S. government and the inevitability of government support increased after the bailout of Bear Stearns. He argues, however, with the methods used by the Bush administration. "They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted -- with necessary taxpayer support to make them financially viable -- as five or 10 individual privately held units," which the government would eventually auction off to private investors.

Greenspan's worst fears about the GSE's are likely to be realized if the majority of economist responding to a poll taken by the Journal are correct.

53 economists felt, on average there was a 59 percent chance that the Treasury Department will have to step in to bail out one of the two if not both of the mortgage giants.

Treasury Secretary Henry Paulson assured Congress last month that his plan to either extend credit to Freddie and Fannie or buy stock in the companies was merely a backstop that would hopefully never be used. However, that was before each of the two reported massive losses during the second quarter. One economist noted that 'blank checks almost always get filled in and cashed.'

One third of those polled said that Freddie and Fannie should be nationalized immediately and then split into smaller companies when the housing market improves.

The majority of respondents, however, feel that the GSEs should be pushed even harder to raise private capital in hopes that the market will improve and government assistance will not be necessary. Just one economist -- Lou Crandall at Wrightson ICAP -- said the Treasury Department should invest equity in them now, without nationalizing them.