WASHINGTON – As continued record hikes in housing prices spur talk of a bubble about to break, a Mortgage Bankers Association study offers some advice: "The appropriate stance is one of caution, not of panic." In an analysis of housing and mortgage markets released by the MBA Aug. 23, researchers and economists note a LexisNexis search in July using the phrase "housing bubble" yielded more than 650 articles. Is the concern justified? The study stresses the fundamentals of supply and demand. For example, housing prices in Nevada have climbed 87% during the last five years. At the same time, that increase has been supported by a 16.8% growth in population and 17.8% hike in employment. That contrasts with Ohio, where population has expanded less than 1% and employment is actually down 3.23%. House prices there have sprouted at a much slower rate, just over 23%. "In the long run," the study indicates, "the most important factor influencing housing demand is the ability of households to afford a typical home. The state of the labor market as measured by employment growth is a critical factor. "Faster employment growth has resulted in faster appreciation. Note that Nevada, Florida and Arizona experienced very rapid employment growth as well as population growth," it states. But what about reports that investors, focused on flipping homes without ever living in them, are driving prices up? The researchers suggest much of that activity may not be speculative, but instead involve second homes purchased by baby boomers anticipating retirement in the near future. Even the National Association of Realtors, which estimated that in 2004 nearly one quarter of home buyers were buying a home for investment purposes, also found only three percent of all homebuyers sold within a year. In addition, a national survey by the National Association of Home Builders showed only 4% of single-family homes sold in the first half of this year were investor properties, not primary residences or vacation homes. Yes, but what about new mortgage products such as interest-only and low-documentation loans? Will lenders, including credit unions, see defaults soar if the housing market sours? While certainly not denying a downturn can happen, and risks must be monitored, the researchers sketch a positive picture that suggests a slowdown in home appreciation will not pull the economy down. "The homeownership rate in the U.S. is now over 69 percent," the study states. "According to the American Housing Survey, of these homeowners approximately 35 percent own their home free and clear. Another 51 percent have a fixed-rate mortgage. These 86 percent of owners benefit from house price increases and would not be affected, in terms of their mortgage payment, by an increase in interest rates. "Of the remaining homeowners, a significant number hold jumbo mortgages, indicating they have an appreciable level of income and wealth. Another group of ARM borrowers have been in their loans for years, and their mortgage payment behavior is known. "There is only a small percentage of borrowers that are potentially vulnerable to an increase in rates or other economic shock." The analysis concludes that: Positive economic fundamentals, including low mortgage rates at the national level and strong employment growth rates at the local level, can explain much of the recent increase in house prices and much of the differentials in appreciation rates across the country. Investor activity has increased in certain U.S. housing markets, especially in the coastal areas. Lenders need to prudently monitor the level of speculative activity in such markets. Innovative mortgage products enable consumers to become homeowners. Mortgage lenders have provided a wealth of new products to meet the affordability requirements, cash flow needs, and risk tolerances of a range of borrowers. This range of choices is a clear benefit to consumers. Borrowers increase their risk exposure by choosing a product with low initial payments, but greater variability in payments over time. Borrowers need to carefully evaluate and monitor the incremental additional risk that these innovative new products represent. Regulators are doing their jobs by monitoring factors that may potentially be institutional or systematic risks, and by acting to balance the potential costs of these risks against the benefits of expanded home ownership. * Policymakers and others should recognize there are a number of factors that reduce risk to the housing and mortgage markets. -

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