Is There A Bubble?

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In South Florida, the home market has been so hot some homes have sold twice in the same day. In Las Vegas and other markets, home inventory sells out while still in "preconstruction." Elsewhere, would-be buyers camp out for days to get first crack at properties coming on the market.

With the real estate market booming in much of the U.S., credit unions have ridden the wave and watched their own loan portfolios fill with mortgages and home equities.

All of that has led to fears of a mortgage "bubble" that will burst, and with it so will many credit unions' bottom lines. But those interviewed by The Credit Union Journal don't agree.

According to data from the Office of Federal Housing Enterprise Oversight, home prices doubled in the last five years in places like California, District of Columbia, and Rhode Island. In the third quarter of 2004, prices were still showing double-digit gains in many markets across the country, with Nevada leading with a 36% year-on-year rise.

Phenomenal Business

"Our mortgage line is doing phenomenally well, particularly second mortgages," acknowledged Wayne Tew, CEO of the $476-million Clark County Credit Union in Las Vegas.

With the heated market, lending improved "dramatically," he said.

But now home prices appear to be flat since last summer after gaining 50% in the prior year and a half. "People moved to Las Vegas for jobs, to buy second homes," he said. New residents came not only from California but from across the U.S. There were "lots of people from New York and the East Coast," he noted. Tew said that prices have risen in large part because land in the valley available for sale is limited, with a bulk of it controlled by the government.

With the increased activity, the credit union hired four more loan officers, a 40% increase in mortgage staff at the 34,000-member CU.

Tew doesn't see prices plunging following the rise. "A slight correction perhaps but no significant price drop," he predicted. If there is a decline, prices won't drop more than 10%, he said.

Tew, whose credit union has five branches in southern Nevada, said that interest rates may affect lending if the 30-year rate rises to the point of hitting 7.5%.

Angela Lewis, lending manager at the $166-million, five-branch Community One FCU, also in Las Vegas, agreed that prices are "holding steady" and the market "seems to be leveling off" in the city. Yet she says that prices won't decline as there are "5,000 people moving to the valley every month" and mortgage lending will remain strong.

Because of that, Lewis noted that while Community One has only 10% of the mortgages in-house and the rest out-sourced, it is "looking to a full in-house program by early 2006 at the latest" to take advantage of the situation. The in-house program will give Community One the chance to cross-sell to members, she said.

What's Next?

Bob Dorsa, who heads the American Credit Union Mortgage Association, which promotes mortgage loans by credit unions, says he wouldn't dare predict where home prices are going.

"An economist a year ago pointed several bubble areas where he thought prices where going to implode. In California, New York, and Florida, he thought prices had reached their peak-but prices are still going up," he said.

While some economists believe that there are fundamental reasons behind the home price surge, others say that experience has shown that what goes up may come down.

According to a study by Richard Peach, vice president in the Business Conditions Function of the New York Federal Reserve, there is little evidence to support fears that much of the country is experiencing a home price bubble. Home prices didn't rise on speculation but along with increases in income and interest rate declines, he said.

Specifically, the home market was fueled by cuts that took short-term interest rates down from 6.5% in 2001 to 1% in June, his analysis suggests. Short-term rates have recovered half of the decline by now.

The New York Fed's research said that because rates will increase as employment and income grows, the real estate market won't lose support.

The National Association of Federal Credit Union's economist Dr. Tun Wai says that while it is true that higher prices may reflect stronger demand, it would be good to consider possible scenarios and remember the past to avoid being over-exposed.

"What's important is to look at it (demand for homes) going forward," he said. These are products that are very interest-rate sensitive," he said.

"We had a cycle before when rates went up exorbitantly. In the early 1980s lots of property values dropped significantly. If you have an owner losing all his equity in a house, he may say I'm not paying anymore, I am declaring bankruptcy," he said.

"That situation is probably not likely to occur in the near future... I don't think rates are going to go up in double-digits. The Fed would probably put on the brakes, cool down the economy. They are very much an inflation hawk," he said.

Still, there will be a point when things will "cool down" not just as the result of actions taken by the Fed, but also because many people who have qualified to buy a home will have already purchased one, he said.

The tightening would likely reduce demand gradually, without a dramatic effect on the market, Dorsa believes, adding that while credit unions shouldn't shy away from granting mortgage loans, some caution is needed.

"Credit unions are there to help their members, so if a member wants a house they should grant a loan," he said. He reminded that credit unions should ensure all non-adjustable-rate loans "are sellable to let the market fund the risk" of any unexpected interest rate surge.

Bullish on Real Estate

Lucien Salvant, who is managing director of the National Association of Realtors, says the market will remain strong and demand will keep thriving.

"There is no such thing as a housing bubble. It has never happened, it's not happening and it will never happen," he told The Credit Union Journal. For home prices to plunge, "lots of things would have to be going on in the economies of the world," he said. "For the last 40 years home prices have appreciated," he stressed.

He said the industry has enough mechanisms in place to assure most transactions are carried out at fair market value and most loans are repaid. In addition to "safeguards" such as appraisals and credit scores, he said that average prices look high because the "high-end homes are pulling up" the values and that affordable homes are more common than they may appear.

Salvant said that the double-digit appreciation of recent years has been "unusual" but that was due to also "unusually high demand."

Demand is coming from "Baby Boomers reaching their maximum earning period and the 'echo-boomers' becoming of age to buy homes," he observed. "There is also a large population of immigrants and it takes them anywhere from two to 10 years to collect the necessary downpayment."

The supply side also contributed to the price increase as there are "low inventories, some materials are going up."

If anything, there is already a healthy cooling off period, he said.

"We are starting to satisfy some of those requirements. As new home are being built, the rate of appreciation will go down. It is still going up," Salvant said.

Demand will remain healthy as "people's earnings are rising, are more secure in their jobs and everyone wants a piece of the pie," he said.

Asheville's Growing Pie

Asheville, North Carolina, near the Blue Ridge Mountains and terminus for the Blue Ridge Parkway, looks like one of those places where everybody wants "a piece of the pie." It helped that the American Association of Retired People called it a "dream town" and MSN Money picked it as one of the best places to buy a home, said Rita Gentry, CFO of the $61-million, 15,000-member Telco Community Credit Union, which is based in the town.

"I don't think that rising interest rates will curtail home buying or building in this area," she said.

Job growth in 2004 expanded by 6% over the previous year. The average price of homes grew some 16% over 2003 and new residential construction rose 19% between 2003 and 2004, Gentry said. "And this has been the norm for the past several years," she said.

Rising interest rates can only make growth slow down "slightly" because Western North Carolina is a very popular area. Tourism plays a big role, she said.

"The 30-year fixed rate just reached 6% this week (early April) but even if the 30-year reaches 7% by year's end, I don't think we're going to see a slow down of any consequences in our area. Historically, rates at around 6%-7% have been very attractive levels," she said.

"I do believe the value of the real estate market will continue to rise, maybe not so much as in the past few years, but yes, appreciation will continue in most areas, especially Asheville," she said.

The booming of the home market helped the credit union's lending, she said.

"The (mortgage) portfolio has grown over the past several years. Currently, we have about 30% of our total loan portfolio in fixed mortgages. The largest increase in mortgages came during 2003. Our portfolio of mortgages increased by 15%," she said.

It could have increased more if it weren't for a cap that was placed on the CU's mortgage portfolio. With the cap, Telco continues to originate mortgages to sell in the secondary market.

Bigger Piece of Portfolio

The percentage of mortgages (including home equities) comprising the credit union community's loan portfolio was 45.9% in September of 2004, up from 38.8% in 2000 with steady gains annually, according to nationwide figures published in CUNA's Economic Outlook and Credit Union Finance booklet.

The percentage of credit unions offering first mortgages rose from 46.8% in 2000 to 52.8% by September of last year, the booklet showed.

The data also shows that most credit unions continue to shy away from first mortgages.

The booklet said that 57.6% of all credit unions have 0% of assets as fixed-rate first mortgages and 23.7% of credit unions have between 0% and 10%. Only 11.5% of credit unions have between 10% and 20% of their assets in the form of first mortgages.

Missing It

While home prices surged in many areas, especially across the south, states such as Indiana and Utah have lagged behind and missed the boom with cumulative gains below 20% for the past five years.

According to CUNA's data, home prices in Texas, for example, only rose 25% over the past five years. In the 12-month period prior to the third quarter of 2004, home prices gained 3.8%, the smallest rise of all the 50 states.

Ernest Martinez, a loan officer from Fieldstone Mortgage who works with Smart Financial Credit Union in Houston, said prices may have lagged there "mainly because of too much supply."

Martinez noted, for instance, that that there is still plenty of land available for development both in the suburbs of Houston and near the city's downtown.

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