Monday, September 26, 2005

Greenspan: Homeowners could weather price drop

Federal Reserve Chairman Alan Greenspan, softening his concern about a possibly overheated housing market, said Monday that many homeowners have enough equity to cushion the shock if prices drop.

On housing, Greenspan continued to register concerns about soaring house prices and some people taking out risky mortgages to buy expensive homes that they otherwise couldn't afford.

But he indicated that most homeowners are in a fairly good position in the event that house prices drop.

"The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," he said. Less than 5% of home borrowers were highly leveraged, according to one measure, he cited.

When I read this, my first thoughts were of all the cautionary articles I'd seen throughout the year talking about how many people were in way over their heads. Factoids from the first one I pulled out, an MSM column published last December:

Nearly 9% of the mortgages made last year were subprime, or made to people with troubled credit or uncertain finances. That’s up from 4.5% in 1994. In terms of volume, $388 billion in subprime-mortgage loans were originated in the first nine months of this year -- more than triple the amount made eight years ago, according to Inside Mortgage Finance Publications, a Bethesda, Md., company that provides news and statistics to the residential-lending industry.

Zero-down loans totaled more than $80 billion last year. They were virtually nonexistent a decade ago. Another relatively recent phenomenon is the 125% loan. It allows people to borrow more than their homes are worth.

More than one-third of mortgage applications in recent weeks have been for adjustable, rather than fixed-rate, mortgages. ARMs expose consumers to more risk, because their payments can rise along with interest rates.

Interest-only loans were, until five years ago, almost exclusively a product for the wealthy, who had plenty of real estate exposure in their portfolio. Now they’re being pushed as a viable alternative for the average Joe -- who is probably underestimating the potential risk he’s taking on. Interest-only loans now make up 25% of all the loans that are securitized, or sold to investors, and are even being pushed in the subprime market.

These kinds of numbers suggest to me that Greenspan's figure of 5% at risk is pretty rosy. But even if it's accurate, what's the "tipping point" wherein a limited number of foreclosures or personal bankruptcies start undermining the economy (national or local)? I'm certainly no economist, but if five percent of Rhode Islanders went bust tomorrow, I'm pretty sure it would mean wider-spread Bad Things and affect my financial well-being as well.


Blogger bluememe said...

Sounds like "Irrational exuberance" to me...

5:13 PM  

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