Feds No Longer Dismiss Talk Of Housing Bubble

Regulators focus on role of 'exotic' loans in propping up prices...

MSNBC.com reports that even the most optomistic housing industry boosters are beginning to worry and to wish out loud for a cooling off period.

There are growing signs that federal regulators would like to rein in some of the worst excesses of the current boom, including the increasing dependence on interest-only loans and other non-traditional lending products that can leave borrowers over-extended, especially if interest rates rise and housing values drop.

The concerns cited include the fact that in California, the median price for an existing home has surged to $523,000, double the $262,000 median price just four years ago. A study by NAR found that more than 35% of home sales were for investment purposes or as second homes. Ten states have seen prices rise more than 70% over the past five years, and prices have doubled in 23 markets.

A cover story in the Economist magazine this month calls the global rise in housing prices "the biggest bubble in history" and warns of economic pain to follow. The concern is that loan losses could rise if home prices level off or even decline, and that aggressive, interest-only loans could create a vicious cycle of declining prices as homeowners scramble to get their equity out before a foreclosure.

The other concern is the effect that a housing slowdown would have on the overall economy. Consider the range of industries that would be affected by a slowdown in housing activity, including construction workers, material suppliers, brokers and mortgage bankers, furniture and appliance providers, etc... All told, the industry accounts for 16% of the nations economic activity. More...