Loan regulators discount fears of housing bubble

WASHINGTON — Bubble, what bubble?

Top officials at the Federal Deposit Insurance Corp. (FDIC), which regulates national banks, yesterday 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, 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 past three years.

Some economists think 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.

Today, 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.

Even in markets with steep price gains, busts don't necessarily follow booms, said 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.

Some pessimistic economists think 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.