NCPA - National Center for Policy Analysis


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.


  • 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.

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