Bubble Isn't All That Big

Many times in the pages of this newspaper, we've quoted "experts" expressing concern about the possibility of a bubble in real estate values that is liable to burst. Why, this editor has sometimes even weighed in among the worry mongers himself.

But one point must be conceded. If there is a national "bubble" in real estate prices, it's waiting an awfully long time to rear its ugly head.

And economists who discount the risk of a bubble, among them the chief economists of the National Association of Realtors and the Mortgage Bankers Association, have some pretty solid evidence to back up the contention that at least on a national scale, there is not likely a "bubble" in home values.

Douglas Duncan, the MBA's top economist, made that point pretty persuasively in a recent meeting with editors at Source Media, the publisher of this newspaper.

In judging the impact of a potential "bubble" on home prices, it's worth noting that not every property is backing a particularly risky loan. In fact, more than a third of homes - 34.6% - carry no mortgage debt whatsoever. The owners of these homes won't be defaulting on any loans if their property values decline. Moreover, they are largely the type of owners who can afford to wait out a down market, and are therefore less likely than leveraged borrowers to contribute to a glut of homes for sale in a down market sometime in the future.

Another 51% of the housing stock belongs to homeowners who have a fixed-rate mortgage. These borrowers tend to be more conservative with their money and will benefit from not having to endure payment shock in a rising interest rate environment. Overall, while their default rate could go up, they are also well positioned to weather a decline in home prices.

Together, the outright owners and the fixed-rate customers account for about 85% of the housing market. That leaves just 14.4% of the current market with adjustable-rate mortgage products. This is the riskiest segment of the market, because many of these borrowers have turned to hybrid and pure ARM loans to keep their monthly payment low and stretch their buying power.

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