Possible home-price bubble is mostly overblown, lenders say

Market fundamentals explain boom, they say


Much of what's being said and written about a possible home price bubble is overblown, but the housing market does face "a number of risk factors" that should be viewed with caution instead of panic, the nation's largest association of mortgage lenders said last week.

"There are risks but they're far less dramatic than the hyperbole of recent months," contends Doug Duncan, chief economist of the national Mortgage Bankers Association (MBA).

The association released a 30-page report - Housing and Mortgage Markets: An Analysis - exploring the possibility of a housing bubble and the so-called innovative mortgages that some worry are a threat to consumers and the marketplace.

Separately Tuesday, the National Association of Realtors reported that the number of homes nationwide that resold in July fell 2.6 percent from a record June but rose 4.7 percent from July 2004, to the third-highest monthly total ever.

The nation's median resale price rose to $218,000 in July, up 14.1 percent from a year ago.

The inventory of homes for sale nationally at the end of July rose 2.6 percent from June to 2.75 million homes. That was up 13 percent from a year ago.

David Lereah, NAR's chief economist, explained in a statement that the July sales "were a big number any way you slice it, and housing is continuing to stimulate the overall economy."

A Commerce Department report Wednesday found that new-home sales in July soared to a seasonally adjusted annual rate of 1.41 million units. That represented a 6.5 percent increase from June's pace of 1.324 million units, which had been the previous record.

Duncan's forecast calls for that stimulus to ease a bit in 2006, when he predicts slower home sales will tame price appreciation to about 4 percent annually amid a leveling off, or possibly an increase, in mortgage delinquencies. This will have a "modest slowing effect on the U.S. economy," he said.

In their fairly sanguine assessment of the housing boom and the rise of innovative home financing in recent years, Duncan and other MBA researchers essentially argue that market fundamentals explain the extraordinary price growth in most housing markets: i.e., low mortgage rates, population growth, demand for housing that can't be met by new supply, and rising employment.

"We're trying to dismiss the overheated rhetoric on bubbles ... that just because there have been price increases that that's automatically a bubble," said Jay Brinkmann, MBA's vice president of research and economics and one of the report's five authors. "We're not saying it's [impossible] that in some markets there's something of a bubble but, in most markets where people claim there's a bubble, there are market fundamentals that explain the price increases."

The study does warn that relatively high levels of investment activity in some regions are a red flag, and that lenders and consumers alike must be careful to evaluate the risks associated with popular new forms of loans. Those include loans offering interest-only payments and fixed introductory rates, usually for two to five years, after which the borrower could face payment shock as the rate becomes adjustable and payment become higher to begin paying off principal.

"There is no suggestion that we live in a brave new world immune from risk or the possibility of a downturn," the report notes in its conclusion.

The study credits banking regulators with keeping a watchful eye on riskier lending practices: "Regulators are doing their jobs," the report says, "by monitoring factors that may potentially be institutional or systemic risks, and by acting to balance the potential costs of these risks against the benefits of expanded homeownership."

Ed Leamer, an economist at the University of California, Los Angeles, disagrees.

"I'm very much doubtful that the regulators have their eye on this ball adequately," Leamer said. "People are taking on enormous risk without realizing it."

The MBA report mentions six major "risk factors" that, when layered, could portend a housing market downturn in a region: a high and sustained level of price appreciation; a decline in employment; significant investor activity, especially flipping of properties for a quick profit; a significant share of condominium sales relative to all home sales; an unusually high share of interest-only loans and others that expose borrowers to "potentially substantial payment shock"; and unusually large numbers of stated-income loans, where there is no verification required of income.

To view a copy of the MBA's report, go to: www.mortgagebankers.org.

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