by Calculated Risk on 6/23/2005 11:16:00 AM

Federal Reserve Governor Mark Olson expressed concern today about "homebuying decisions premised on unrealistic rates of home appreciation":

Over the past several years, there has been an explosion of new and novel mortgage products, including mortgages that allow homeowners to skip mortgage payments (which results in increasing the size of their mortgage balance) and mortgages that allow homeowners to pay only the interest on a loan, and not the principal, for a preset period at the beginning of the life of their mortgage loan. Many of these products can be useful financial tools for homebuyers and, indeed, may have helped make homeownership more accessible for some households. But to the extent that these new mortgage products promote homebuying decisions that are premised on unrealistic rates of home appreciation, they raise concerns. Some borrowers may not be able to sustain such a loan over a long time horizon if the pace of home price growth moderates. In particular, when the payments on these novel mortgages adjust upward, the homebuyer may not be able to refinance such mortgages unless the home has increased in value.

At the same conference, according to an MSNBC article, Cleveland Fed President Sandra Pianalto cited a study:

... that found 25 percent of Americans claim to have no spare cash after covering regular expenses, warned that tapping wealth stored in the family home carries risks.

“Increasingly, home owners are using home equity as a source of ready cash ... this doesn’t bode well for the ownership society that we’re trying to build,”

In a related commentary Double bubble trouble Danielle DiMartino points out that:

Delinquency and foreclosure rates have been falling

The reason, said MBA chief economist Doug Duncan, is strong job creation.

Housing is a chief driver of job creation.

Housing is being driven by "creative loans". (see Olson's comments above)

And she concludes:

The debate reminds us that falling prices not only will coincide with higher foreclosures, they also will be accompanied by millions of pink slips.