NCPA - National Center for Policy Analysis

THE BICOASTAL HOUSING BUBBLE

September 15, 2005

Today, many of the economists who correctly predicted the stock market bubble would burst are saying that the housing market is in a bubble. If it collapses as the stock market did, the impact could be even more painful. That is because homeowners are much more leveraged than they used to be, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

Consider:

  • According to the Federal Reserve, home equity -- the portion of a home's value not covered by a mortgage or equity loan -- has fallen from 75 percent of home values a generation ago to 56.3 percent today.
  • In the first half of 2005, two-thirds of homebuyers financed more than 80 percent of their purchase, and 38.1 percent borrowed more than 95 percent, according to SMR Research; historically, loans with less than 20 percent equity have been considered risky.
  • According to the Federal Home Loan Mortgage Corporation ("Freddie Mac"), in the last four years homeowners have taken $559 billion in equity out of their homes by refinancing.

Additionally, many homebuyers are making larger mortgage payments than their incomes will support, according to financial experts:

  • According to the Federal National Mortgage Association ("Fannie Mae"), 28 percent is the most one ought to pay.
  • Almost 40 percent of California homeowners -- compared to 29 percent nationally -- pay at least 30 percent of their income for housing, according to the Public Policy Institute of California.
  • In California, 15.4 percent of homeowners pay as much as 50 percent of their income for housing, including mortgage, taxes, insurance and utilities; this includes 20 percent of recent homebuyers -- nearly twice the proportion of homebuyers nationally (10.6 percent).

Source: Bruce Bartlett, "The Bicoastal Housing Bubble," National Center for Policy Analysis, Brief Analysis No. 526, September 15, 2005.

For text:

http://www.ncpa.org/pub/ba526/

 

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