...But Bubble Babble May Be All Talk

Everyone is talking about a "bubble" in house prices, but most economists who follow the housing finance industry see little evidence of a widespread problem with house prices.

Sure, some hot markets may be vulnerable to a decline in home values, especially if interest rates rise markedly or the economy takes a dive. But for most of the nation, home values remain in line with historical reference points.

And for most homeowners, even a flattening of home price appreciation or an outright decline may post little risk.

Doug Duncan, chief economist at the Mortgage Bankers Association, put the debate into perspective during a recent meeting with editors at SourceMedia's mortgage publications.

He points out that more than a third of homeowners - 34.6% - have no mortgage debt at all on their property. And another 51% have a fixed-rate loan, so their monthly payments won't adjust upward if rates do move higher. All told, that means 86% of households either have no debt or have a conservative, fixed-rate home loan.

While the share of homeowners with adjustable-rate mortgages has been climbing, it remains a modest share of the market, he pointed out. Until the recent drop in long-term interest rates, ARMs had been accounting for well over 30% of new mortgage applications. But that still hasn't translated into a high share of the outstanding homeowner market.

"Basically, you are talking about 14% to 15% of the market that has an ARM," he said.

So while hybrids and interest-only mortgages have been getting a lot of press, the rise of new mortgage products does not put a large share of households at risk of finding themselves underwater or unable to make payments should home values stall or fall.

Mr. Duncan concedes that "a few markets," where home prices have risen most dramatically, could be poised to fall if the economy runs into trouble. But he also notes that overall, the supply of homes on the market for sale remains modest, at just over a four-month supply for both new and existing homes. That's down from over six months in 1995.

And the MBA expects mortgage financing, a key factor in home prices, to remain affordable. Mr. Duncan said the average 30-year, fixed-rate mortgage coupon rate is expected to be 5.8% this year, rising to 6.6% next year in his forecast.

He also expects job markets - the largest driver of changes in home values - to continue to strengthen.

But not everyone is sanguine about the prospects for housing values.

The International Monetary Fund recently released a study that says 15 states face a potential bubble in home prices. Among the states listed are most of the nation's largest, including California, New York, Florida and New Jersey. The 15 states on the IMF's list account for 35% of the U.S. economy, suggesting that a cooling off of housing market activity could have significant ramifications.

SNAPSHOT: Median Price for Existing Home

2004 $184,000

2005 $196,000

2006 $205,000

Source: MBA Mortgage Finance Forecast

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