A group of the nation's real estate reporters went back to school last week in Charlotte, N.C., where a top housing economist explained, among other things, why they shouldn't panic when delinquency and foreclosure rates move higher, as they inevitably will.
"There's no question" that late payments will rise, Doug Duncan, chief economist at the Mortgage Bankers Association, told the journalists. "But it's not going to be a disaster."
It won't be that big a deal when the repossessions rise, either, Duncan said at the National Association of Real Estate Editors annual conference at the Marriott Hotel, adding that the percentage change in the foreclosure rate is a far more important indicator than the absolute number.
"The number of foreclosures is absolutely going to go up," he said. "But the percentage could fall."
Equally as important, the housing economist added, is that the mortgage market "has already priced in" the fact that take-backs "have to go higher."
Duncan said that given that over half the mortgages on the books today are less than three years old, and the probability that a loan will go delinquent is highest in the third through the fifth year, it's "almost guaranteed" that the rate of late payments will rise in the coming months.
He also pointed out that the shift to adjustable rate mortgages that followed the end of the recent refi boom is another portend of rising delinquency rates.
"After every refi boom, there's an ARM boom," he said. "The thing that ends refinancings is higher rates, and consumers shift to ARMs when rates start to rise. It's a perfectly normal, cyclical change in the market. And ARMs always have slightly higher delinquency rates."
The MBA economist conceded that lenders are digging deeper than they ever have into the pool of riskier borrowers, and that adding higher mortgage rates and the shift to non-traditional loan products into the mix doesn't bode well for late rates.
But he predicted that higher delinquencies "won't be a macro event that melts the housing market," as some prognosticators have warned.
For one thing, he said, a huge share of the nation's home owners do not have to worry when loan costs move higher. More than four out of five owners "are not interest-rate sensitive at all" because they either own their homes free-and-clear with no debt or they have fixed-rate mortgages, he explained.
Beyond that, he also pointed out, half of the 15 to 18 percent of owners with adjustable rate loans are high-income borrowers who "always have ARMs" and have the wherewithal to withstand any payment shock that lies ahead.
Duncan also schooled the writers to watch the condominium sector when tracking prices in their own individual markets. But he suggested that even if prices actually decline in some places, it won't be disastrous for the housing market as a whole.
Condos bear careful scrutiny because of all the various forms of home ownership, they are the "most liquid," he said.
Although condos have been leading prices down in several markets, the MBA economist continued to maintain that the nation's housing market is simply "normalizing" after a five-year run of record sales and price appreciation, a run that simply could not be sustained any longer.
The MBA expects sales to decline 8 to 9 percent this year and appreciation to slow to the 6 to 7 percent level. But Duncan said lenders, builders and real estate sales professionals have no right to gripe about the slide.
"No whining," he said. "This year will be a record compared to 2003, which isn't bad."
He also told the real estate writers to look at the underlying demographics to understand why prices may dip in their own markets.
"If there's a weakening in employment, it will lead you to (weakening) house prices," he said. "That's the market 'normalizing,' but it's not a price bubble, it's an employment problem."
