Loan regulators discount the idea of nationwide housing bubble

Knight Ridder NewspapersJune 27, 2005 

WASHINGTON—Bubble, what bubble?

Top officials at the Federal Deposit Insurance Corp., which regulates national banks, on Monday dismissed fears that rising home prices nationwide reflect a speculative bubble ready to burst.

Nationwide home prices grew by more than 12.5 percent in the first quarter of this year compared to first quarter 2004, 11 percent last year and 8.4 percent over the past five years. The nation's hottest markets have had price gains exceeding 30 percent in the last three years. Some economists believe that housing prices are being driven by speculative investment based more on faith that prices will rise even further than on economic fundamentals.

FDIC officials, however, frowned on the notion that the recent rise in housing prices is a speculative fluke. The banks the FDIC regulates hold 30 percent of the credit risk on outstanding U.S. mortgages. On Tuesday the agency will release new state-by-state economic profiles. Taken together, the profiles conclude that most booming U.S. housing markets are sustained by strong growth in new jobs.

"In general, that is where home prices are rising most rapidly," said Barbara Ryan, associate director of the FDIC's research division.

For example, she said, Nevada recorded a 31.22 percent rise in home prices for the first quarter of 2005 over the same quarter in 2004. In the same period, it posted job growth of 6.7 percent, far higher than the 1.6 percent year-over-year national average.

Arizona had the seventh-fastest climb in home prices in this year's first quarter—and the second-fastest increase in jobs. Florida had the fifth-fastest climb in home prices and jobs.

In December 1996, Federal Reserve Chairman Alan Greenspan famously warned of "irrational exuberance" when describing a bubble in stock prices that collapsed in 2000. He's using softer language today regarding the housing market, describing excessive home-price jumps in some markets as "froth."

Many economists believe that "froth" is primarily in California, and statistics suggest as much. California posted the second-fastest growth in first-quarter home prices over the previous year, but ranked 26th in job growth.

Even in markets with steep price gains, busts don't necessarily follow booms, cautioned Richard Brown, the FDIC's chief economist.

FDIC researchers examined data from 55 metropolitan areas that saw a boom at some time between 1978 and 2004—defining a boom as an inflation-adjusted rise in home prices by 30 percent or more over a three-year period. A bust followed the boom in only nine instances—with a bust defined as a drop in nominal prices by 15 percent or more over a five-year period.

The few busts that followed booms came after significant external factors such as the mid-`80s collapse in world oil prices that rocked the Houston market, or the loss of jobs when a huge employer went out of business.

As for lending trends, FDIC officials said there are reasons for optimism and concern. On the plus side, delinquent mortgage loans made by federally insured lenders stand at just 0.75 percent.

"That is the lowest in the 22 years that these data have been put together," Brown told Knight Ridder. "Have low interest rates in recent years had something to do with it? Absolutely, that salves a lot of wounds there and it's not going to stay that low forever."

The trigger that could prompt change is the downside—home prices are far outpacing wage gains.

"Affordability is becoming a major issue," said Brown. "As affordability gets stretched, that tends to limit price increases eventually."

Some pessimistic economists believe that creative financing with interest-only and exotic adjustable-rate loans have enticed many Americans to purchase homes they can't afford. When long-term interest rates finally go up, they predict, many borrowers using such loans—the fastest-growing segment of the mortgage market—will be unable to make payments, and foreclosures will soar.

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Updated state-by-state economic profiles will be available at 8:30 a.m. EDT Tuesday on the following FDIC link: www.fdic.gov/bank/analytical/stateprofile/index.html.

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(c) 2005, Knight Ridder/Tribune Information Services.

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