WASHINGTON, D.C. - Most homeowners -- 75 percent of them -- have a 20 percent or greater equity stake in their homes and that's plenty to cover a significant drop in home prices.

However, the vast majority of homeowners needn't fear big price drops because such an event will likely occur only locally. Economic diversity holds sway over statistical models that predict a nationwide home price drop.

That's according to Federal Reserve Chairman Alan Greenspan who in a recent speech repeated a refrain that punches holes in theories that the housing market is an overinflated bubble about to burst.

"These concerns cannot be readily dismissed. Debt leverage of all types is often troublesome when one judges the stability of the economy. Should home prices fall, we would have reason to be concerned about mortgage debt; but measures of household financial stress do not, at least to date, appear overly worrisome," he said in a speech before the America's Community Bankers Annual Convention this week.

Greenspan said 75 percent of all outstanding first mortgages were originated with a loan-to-value ratios of 80 percent or less and when all mortgages are considered the loan-to-value ratio is about 45 percent, giving the nation, as a whole, a 55 percent equity stake in residential real estate.

"It would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity," he told conventioneers.

Greenspan said housing price bubble theories also assume there is too much speculation in the market and that home buyers are looking at homes as get-rich-quick investments, but in reality expensive buying and selling fees and the need to have a roof over one's head prevent such conditions.

He said investors accounted for only 11 percent of the total home mortgage originations in 2003 and represent a small fraction of the overall housing market.

"Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," Greenspan said.

He did voice concerns about the rapid run up in household indebtedness which has outpaced income growth. And the chairman does agree that home price appreciation will slow down from its frenetic pace of recent years.

"Most analysts, even those who do not foresee a mounting bubble, anticipate a slowdown in both home sales and the rate of price increase...If house turnover and price increases both slow, and presumably mortgage debt extensions on new homes do as well, increases in home mortgage debt will slow. Outright declines in mortgage debt seem most unlikely. Home mortgage debt has increased every quarter since the end of World War II."

He also said:

• One percent of the average annual growth of home mortgage debt comes from renters who have become homeowners since the early 1990s.

• Information technology-driven lending improvements has enabled more underserved borrowers to buy homes without significantly increasing the number of households with over-extended indebtedness.

• Recent higher debt-to-income ratios "some of which is more statistical than real" has only modestly increased the level of financial strain on households.

• Persistently elevated levels of bankruptcy indicates pockets of distress in the household sector, but only to a minimum.

• Most households are financially stable. The Federal Reserve's measures of financial stability, the debt-service ratio and the financial obligations ratio rose during the 1990s, but the debt-service ratio stabilized in the past three years and the financial obligations ratio has dropped since 2002. Much of that is due to low mortgage rates which allow homeowners with equity to buy more for less.

"Indeed, the surge in cash-out mortgage refinancings likely improved rather than worsened the financial condition of the average homeowner. Some of the equity extracted through mortgage refinancing was used to pay down more-expensive, non-tax-deductible consumer debt or to make purchases that would otherwise have been financed by more-expensive and less tax-favored credit," Greenspan said.

"In addition, a significant decline in consumer incomes or house prices could quickly alter the outlook; nonetheless, both scenarios appear unlikely in the quarters immediately ahead. If lenders, including community bankers, continue their prudent lending practices, household financial conditions should be all the more likely to weather future challenges," he concluded.

Published: October 21, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.