When home prices inflate to near "bubble" proportions, do homeowners have trouble making on-time payments on their large mortgage balances?

You might expect that the answer would be yes. After all, it stands to reason that in markets where housing budgets are stretched to the limit by high prices, homeowners might pay their mortgages late on occasion.

But a new nationwide loan delinquency study shows the opposite to be generally true: Some of the highest-price, highest-froth markets are also the best performers when it comes to on-time monthly mortgage payments.

The Mortgage Bankers Association of America’s latest delinquency survey, covering nearly 39 million outstanding mortgages, found that in the fourth quarter of 2004, Hawaii and California -- both high-cost, double-digit appreciation hotspots for the past several years -- have the lowest rates of late payments in the country. In that quarter, just 2.02 percent of Hawaii homeowners and 2.04 percent of Californians were delinquent on their loans. That compares with a national average for the same quarter of 4.56 percent.

Some low-inflation housing markets, on the other hand, were among the worst performers for on-time payments. Nearly nine percent of Mississippi homeowners were delinquent in the fourth quarter, and 7.2 percent of mortgage borrowers in Louisiana were behind.

The high-inflation, low-delinquency pattern extends to most of the pricey East Coast markets as well. For example, the District of Columbia, where average home prices have doubled in the past five years and soared 23 percent in 2004, homeowners had a 3.6 percent delinquency rate in the fourth quarter, well below the national average. In Massachusetts, which has seen the highest overall appreciation in the country over the past 20 years, the delinquency rate was 3.24 percent. High-priced New York and New Jersey were also well below the national delinquency average, with rates of 3.85 percent and 3.95 percent respectively.

Moderate-cost states in the Midwest and South with low appreciation tend to have mortgage delinquency rates at or above the national norm, according to the new survey. Indiana, for example, had a 6.9 percent delinquency rate, Ohio 6.23 percent, Nebraska 5.5 percent, Georgia 6.3 percent and West Virginia 6.6 percent. Indiana home prices gained just 3.7 percent last year -- well below the 11.2 percent national average, as calculated by the Office of Federal Housing Enterprise Oversight. Ohio prices gained by 3.9 percent, Nebraska by 5 percent, Georgia 5.2 percent and West Virginia 8 percent -- all well below the national mean.

Delinquency rates for lower credit-quality "subprime" borrowers followed much the same pattern as for prime, high-credit quality borrowers state by state. Mississippi subprime borrowers were the worst performers in the survey, with 19 percent -- nearly one out of five -- homeowners behind on their payments. California and Hawaii subprime borrowers were at the top of the heap again, with delinquency rates just over 5 percent.

The bottom line here? Despite some economists’ dire predictions of widespread mortgage defaults and delinquencies in high priced "bubble" markets, especially in California, there is no statistical hint of that in the latest study. To the contrary, it appears that borrowers in markets where prices are high and fast-inflating have the incomes to handle their big mortgages better than borrowers in lower-income areas who have smaller loans and lower prices.

Published: March 28, 2005

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.