Real Estate Drama?

Given all of the recent attention spent analyzing the real estate market’s potential downturn, is all of the hype merited?


Although credit unions have been mired recently in a slow growth environment, the loan portfolio has remained a strong performer. Loans outstanding grew 10.7 percent in 2005 to $468.8 billion. Real estate loans comprised 47.8 percent of the loan portfolio and the credit union industry saw first mortgages and other real estate loans outstanding grow 12.6 percent and 19.3 percent respectively (see graph) in 2005.

However, speculation regarding a real estate bubble has caused concern from federal regulators to consumers. While there has been evidence to support a slowing real estate market, the questions that remain are how far will the market drop, how long will it last, and how will the housing market impact the national economy.

While loan growth is up in all categories, there is disagreement about whether real estate loans will maintain their momentum in 2006. HELOCs for example are projected to return to more moderate levels due to flattening housing prices. Homeowners may be less willing to withdraw equity if they perceive a cooling market with prices not increasing at the pace they have in recent years. Some borrowers are even exercising optional conversion clauses as adjustable-rate loans now offer less of a pricing advantage due to the flat yield curve. And many existing HELOCs are beginning to switch to a closed-end, fixed-rate loan on a date that was set at origination.

Credit union other real estate loans closely track national home equity withdrawal trends over the last 10 years. If home equity withdraw slows, consumer spending will be negatively impacted. A Goldman Sachs Economic Research Group 2005 study found that beginning in 2003 there has been a strong correlation between home equity borrowings and consumer spending levels. The housing market has been one of the bright points in the economy, and if it falters and returns to normal price appreciation levels, it would curtail consumer spending that has helped the economy maintain its healthy status.

However, the National Association of Realtors (NAR) is predicting a soft landing for the real estate market. The Pending Home Sales Index slipped 1.1 percent to 116.3 in January from 117.6 in December, and is 4.8 percent below January 2005. The index is determined by sampling pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed. “This looks like we’re touching down for the soft landing we’ve been expecting,” said NAR Chief Economist David Lereah in a March 6, 2006 press release.

Fourth quarter price appreciation trends are strong as well. The Office of Federal Housing Enterprise Oversight (OFHEO) recently released that average house prices appreciated 12.95 percent from the fourth quarter of 2004 to the fourth quarter of 2005. “Despite recent indications that a slowdown may be forthcoming, house price appreciation during 2005 continued to hover at near-record levels,” said OFHEO Chief Economist Patrick Lawler in the fourth quarter 2005 House Price Index report.

Monthly housing starts are even at a record level according to the National Association of Home Builders (NAHB). Privately owned housing starts reached a seasonally adjusted annual rate of 2,276,000 in January 2006, 14.5 percent higher than December 2005 and 4.0 percent higher than January 2005.

It’s difficult to know which source(s) to believe, but the anticipated real estate collapse so far appears to be more hype than reality on a national scale. It will be interesting to monitor home equity withdrawal levels over the next 12 months and observe how they impact credit unions’ balance sheets.