NCPA - National Center for Policy Analysis


August 24, 2005

Today, many of the same economists who correctly predicted the bursting of the stock market bubble, such as Yale University's Robert Shiller, are saying that the housing market is in a bubble. If it should collapse as the stock market did, the impact could be even more painful. Consider this evidence, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

Homeowners are much more leveraged than they used to be:

  • According to the Federal Reserve, home equity has fallen to 56.3 percent of their real estate from 75 percent a generation ago.
  • Another Federal Reserve study found that 16 percent of the money taken out was simply consumed.

According to Freddie Mac, people are taking more and more money out of their homes:

  • Cash-out refinancings have risen to 18.1 percent of all refinancings from 7.2 percent in 2003.
  • In the last four years, homeowners have taken $559 billion in equity out of their homes.

More and more homeowners are buying and refinancing with unconventional loans, such as adjustable rate and interest-only mortgages, rather than traditional fixed mortgages:

  • Such loans have lower initial payments, but will rise automatically when interest rates rise.
  • The Federal Reserve says that 47 percent of all residential mortgages by dollar volume are now non-traditional.

Economist John Makin of the American Enterprise Institute notes that housing has a powerful effect on economic growth through construction, employment, purchases of durable goods like refrigerators and in other ways. He estimates that if home prices simply level off and stop rising, it will cut 1 percent off the real gross domestic product growth rate.

Source: Bruce Bartlett, "The Housing Market: In A Bubble?" National Center for Policy Analysis, August 24, 2005; "Flow of Funds Accounts of the United States," Federal Reserve, June 9, 2005; Glenn Canner, Karen Dynan and Wayne Passmore, "Mortgage Refinancing in 2001 and Early 2002," Federal Reserve, December 2002; Office of the Chief Economist, "Cash-Out Refi Report," Freddie Mac, 2nd Quarter, 2005; "The July 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices," Federal Reserve Board, July 2005; and John H. Makin, "The Energy in Real Estate," Wall Street Journal, August 17, 2005.

For Federal Reserve statistical release:

For Federal Reserve study:

For Freddie Mac report:

For Federal Reserve Board survey:

For WSJ text (subscription required):


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