BOCA RATON, FLA. - Those that take the view that there is a bubble in the U.S. housing market - within pockets therein or otherwise - have one burning question: will the fall be hard or soft? Most answer with the safe question, that there will likely be a little of both. But, in any case, experts agree it is likely to be painful.

"Yes, there's a bubble. And it doesn't matter whether it's regional or national, because in the places where it matters, it's there," said Mark Adelson, head of ABS research at Nomura Securities.

Just as some pockets of the nation have experienced a much more rapid home price appreciation than others, such as California's Riverside County versus say Slidell, Miss., some areas will clearly experience a softer fall back to normal levels than others, said panelists at this year's Information Management Network's ABS East conference held here last week. How hard areas will fall is clearly not only a calculation of how high and how fast they've risen, but the fundamentals underlying that growth. Manhattan, for example, will have a different experience than Williamsburg in Brooklyn, N.Y. and South Miami Beach, Fla. is likely to behave differently than North Miami Beach, Fla. simply because of the supply of homes available in those truly desirable areas.

"We definitely look at it regionally, as opposed to nationally. In California along the coast, there is no more land, there is no more building occurring," said Diane Wold, senior vice president for securitization management at GMAC-RFC, who added that she anticipates the housing market will slow gradually, barring the occurrence of a large-scale economic event.

And as market participants prepare for varying levels of damage control after home prices begin cooling, they're eyeing those regional areas where employment prospects are looking dim. Given the dwindling U.S. auto manufacturing market, Long Beach Mortgage's Chief Credit Officer Charles Freeman said he's keeping a close eye on performance of loans originated out of the Midwest. Freeman said he was watching areas from Ohio, Colorado, Mississippi and regions of Texas with exposure to the auto sector. He added that areas with exposure to the energy sector, which he anticipates will experience future price volatility, could begin to show indications of job loss.

Should a rise in interest rates coincide with the current fuel cost spike, an extra pinch could be felt by those in affordability mortgage products, as the rising cost of gas - and not just at the pump - is expected to suck up a fair amount of borrowers' disposable income, particularly this winter.

One estimate put the increase in natural gas cost in the Midwest at 60%, said Richard Rogers, a managing director at Prudential Financial. "We may well have seen the best statistics in consumer credit," he said. Chris Donnelly, a senior vice president at Mesirow Financial, pointing to rapidly rising home prices in areas surrounding even more expensive cities, such as Miami, New York City and Los Angeles, said "people drive a long ways to get to work. Gas goes up, and they're living month-to-month, that house may not be affordable for them anymore."

Freeman said the mounting effects of rising interest rates, slowing home price appreciation, higher fuel costs and the specter of unemployment will leave certain pockets of the country unable to escape the grim situation they realistically could have avoided in the first place - without affordability products. According to Ronald Mass, portfolio manager at Western Asset Management Co., 16% of Californians, based on income, can afford to own a home in the state's currently hot real estate market, compared with the previous low reached back in 1989.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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