Economists and a representative for the National Association of Realtors, in congressional testimony today, raised red flags about “exotic” mortgages and rising interest rates, energy prices and house prices, though they said they do not expect a doomsday scenario for the nation’s housing market.

“With rising mortgage rates, home buyers are becoming exhausted financially, which explains why sales have tumbled in high-priced regions of the country,” said Tom Stevens, president of the National Association of Realtors and vice president of real estate brokerage giant NRT Inc., in written testimony.

He also cited a demand for more affordable property insurance in Florida and the inadequacy of Federal Housing Administration loan limits in high-priced real estate markets.

Stevens said a gradual slowdown for the housing market “is certainly possible and under the right circumstances likely, but that a soft landing is critically dependent upon policies that support a transition to a more normalized market and mitigate changes in local markets in the availability of mortgage financing and other essential elements to home ownership.”

Economists for the Office of Federal Housing Enterprise Oversight, Federal Deposit Insurance Corp. and National Association of Home Builders also offered testimony during a hearing today, titled “The Housing Bubble and Its Implications for the Economy.”

The hearing was held by the U.S. Senate Subcommittee on Housing and Transportation and the Subcommittee on Economic Policy.

A drop in residential construction spending is expected to slash about $21 billion this year from the U.S. gross domestic product and about $49 billion in 2007, Stevens said.

While one-third of the nation’s population lives in markets that are still seeing rising home sales, two-thirds live in areas with declining home sales, he said, and “sales are down significantly in Florida, California, Arizona, Nevada, Virginia and Maryland. These regions experienced the greatest rise in home prices in recent years and affordability has become a major issue.”

Housing inventory has tripled and quadrupled in some areas with declining sales, he said, and “these areas are vulnerable to outright price declines, particularly if interest rates were to rise further.”

The ratio of home prices to income levels, and mortgage debt-servicing costs to income “have greatly increased in some markets to worrisome levels,” he said, with Florida, California, Arizona, Nevada, Virginia and Maryland exhibiting “trends far above the local historical norm.”

Markets in those states could experience price adjustments, he said, though “price declines are likely to be short-lived” because of job growth. Higher-than-expected rises in mortgage rates or inflation, or more monetary tightening by the Federal Reserve could cause prices to fall back further, he said.

But Stevens refuted the existence of a national housing bubble. “All real estate is local,” he said, citing extreme differences in the California and Oklahoma real estate markets as an example.

Richard A. Brown, chief economist for the Federal Deposit Insurance Corp., stated in testimony that FDIC studies have found that booms in house-price appreciation are not necessarily followed by a bust in house prices.

“Instead, they found that housing busts were usually associated with episodes of local economic distress, such as the energy-sector problems that beset Houston in the mid-1980s,” Brown stated.

But the latest housing boom is unique in some ways from past experiences, he said. “The number of boom markets is substantially higher currently than the historical experience.” No markets in Florida met FDIC’s criteria for a housing boom from 1977-2002, though the state was home to 21 boom markets, as defined by the agency, in 2005.

“In addition,” Brown said, “the use of ARMs (adjustable-rate mortgages) and non-traditional mortgage products is unprecedented and could have an impact on future market performance.”

ARMs accounted for about 30 percent of all conventional mortgage loans in 2004 and 2005, according to the Federal Housing Finance Board, and the share of ARMs was higher among sub-prime mortgages, Brown said in testimony.

“What is yet to be determined is the effect that recent changes in the mortgage lending business may have on the ability of homeowners to meet their monthly obligations under adverse housing market conditions,” he stated.

“It remains uncertain how much the ‘payment shock’ associated with these structures may contribute to selling pressure in local housing markets on the part of distressed homeowners or lenders looking to sell foreclosed properties.”

David F. Seiders, chief economist for the National Association of Home Builders trade group, also stated in his testimony that there are “considerable uncertainties about the true dimensions of the risk facing homeowners with ‘exotic’ ARMs,” and “there are a lot of uncertainties about the quality of loan underwriting during the boom housing years.”

A surge in energy prices could also hurt the housing market, Seiders said, and it’s difficult to predict the future behavior of investors and speculators who bought during the boom.

“NAHB’s surveys of builders show large numbers of cancellations of sales contracts before closing as well as less-frequent reports of resales of units closed on earlier. Our forecasts assume that any reflow of units back onto the markets is of manageable proportions and that wholesale dumping does not materialize.”

The real estate downturn “still has some distance to go, if only to work off excess supply in markets for both new and existing homes (including the condo market),” Seiders said. “Builders are cutting back on new permit authorizations as well as on starts of new units, and they are trimming prices and offering sizeable non-price sales incentives to limit cancellations and bolster sales.”

This is a time of “payback” in demand for home ownership, he said, as the boom served to “pulled demand forward.” Demand for housing began to fall off in third-quarter 2005, Seiders said.

House prices increased about 56 percent from mid-2001 to mid-2006, said Patrick J. Lawler, chief economist for the Office of Federal Housing Enterprise Oversight, and inflation-adjusted house prices are 38 percent higher than they were five years ago.

Home prices are at “historically high levels and have already started to stretch past many traditional affordability boundaries,” and Lawler stated in his testimony that “several factors may constrain appreciation rates in the near future.”

While he said housing markets are expected to “perform well” in the long run, “an important caveat … is that healthy housing markets could soften seriously from an unexpected disruption in the ability of Fannie Mae and Freddie Mac to function effectively in secondary mortgage markets.”

Lawler noted that OFHEO is “currently focused on correcting the significant accounting, internal control, management and corporate governance weaknesses” at Fannie Mae and Freddie Mac, and supports the enactment of legislation “that will create a new regulator with adequate funding, bank-like regulatory and enforcement authorities.”

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