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The Housing Boom And Increased Mortgage Risk May Correlate

According to a recently released report by the Federal Reserve Bank of Dallas; Has the Housing Boom Increased Mortgage Risk? [1] some interesting points are made, but no final conclusion is drawn. Here are some highlights:

Regional Nature of the Housing Boom
Appreciation was more pronounced on the east and west coasts, namely due to restrictions on construction and scarcity of available land. Hawaii saw the highest appreciation at 34% and Texas saw the lowest appreciation at 4%.



House Price Appreciation and the Change in ARM Share, 2004
The use of ARM’s correlate with the areas of greatest appreciation.



Loan-to-Value Ratios
High appreciation states actually have lower overall loan-to-value ratios, (ie more conservative). However, their data does not include second or piggy back data which suggests that these areas may actually not be more conservative. I believe these supplemental loan products emerged as a result of higher appreciation.



Their Conclusion
If analyzing mortgage risk based on the delinquency rates, then high appreciation states are actually a lower risk because they have lower deliquency rates. but…

This is predicated on the assumption that owners can simply sell their home at a profit if they can’t afford the payments. The report suggests, however, if home prices fall, then there is concern of increased mortgage risk.