The Housing Bubble and Its Implications for the Economy

So what was the outcome of the recent hearing titled "The Housing Bubble and Its Implications for the Economy" by the US Senate Economic Policy and Housing and Transportation Subcommittees. The usual spin and warnings about ARMs, affordability, soft landings etc...

Real estate, finance experts raise red flags at 'bubble' hearing

Housing inventory has tripled and quadrupled in some areas with declining sales, he said, and "these areas are vulnerable to outright price declines, particularly if interest rates were to rise further."

The ratio of home prices to income levels, and mortgage debt-servicing costs to income "have greatly increased in some markets to worrisome levels," he said, with Florida, California, Arizona, Nevada, Virginia and Maryland exhibiting "trends far above the local historical norm."

But the latest housing boom is unique in some ways from past experiences, he said. "The number of boom markets is substantially higher currently than the historical experience."

"In addition," Brown said, "the use of ARMs (adjustable-rate mortgages) and non-traditional mortgage products is unprecedented and could have an impact on future market performance."

ARMs accounted for about 30 percent of all conventional mortgage loans in 2004 and 2005, according to the Federal Housing Finance Board, and the share of ARMs was higher among sub-prime mortgages, Brown said in testimony.

The real estate downturn "still has some distance to go, if only to work off excess supply in markets for both new and existing homes (including the condo market),"

This is a time of "payback" in demand for home ownership, he said, as the boom served to "pulled demand forward." Demand for housing began to fall off in third-quarter 2005, Seiders said.

Home prices are at "historically high levels and have already started to stretch past many traditional affordability boundaries," and Lawler stated in his testimony that "several factors may constrain appreciation rates in the near future."