Foolishly Or Otherwise, Homeowners Are Unafraid Of A Real Estate Bubble

Economists are more talented than Hollywood screenwriters at crafting disaster scenarios, and they have a favorite one these days: A combination of rising interest rates and declining real estate values creates panic and insolvency among home-owners, tipping the whole economy into chaos. For better or worse, this thesis has yet to win much credence among most people who own houses, judging from a nationwide survey of homeowners by the Los Angeles Times and Bloomberg News.

For one thing, relatively few homeowners (14 percent) anticipate a decline in house prices in their neighborhood during the next six months, while 35 percent think prices will rise. Looking to the next three years, one-fourth think the house they live in will appreciate in value by at least 16 percent; half expect it to rise by 5 percent to 15 percent. Just 5 percent think it won’t appreciate in that period. If house prices are indeed softening already (as some data indicate), lots of homeowners are in for a rude awakening—all the more so since 27 percent have real estate holdings in addition to their primary residence.

Experts have been especially concerned that further rises in interest rates could lead to foreclosures for people with adjustable-rate mortgages. Among homeowners who have such mortgages, though, a mere 5 percent said they’re “not at all confident” of their ability to make their mortgage payments if the rates adjust upwards; 21 percent are “not too confident.” By contrast, 55 percent are “very confident” and 19 percent “somewhat confident” they’ll be able to keep up the payments.

On one score, homeowners are entitled to be more confident than popular wisdom suggests. For all the talk of people tapping into their home equity to finance a spending spree, relatively few homeowners have done this. People who own their primary residence were asked whether they’ve cashed out some equity during the past two years. Seventy-four percent said they hadn’t even considered doing so; another 7 percent have considered it but have yet to act on the thought. Those who have turned home equity into ready cash haven’t necessarily squandered it. Rather, 40 percent put it back into the house in the form of home improvements and repairs. Thirty percent used it to pay down other debts (including, in some cases, other mortgages).

More broadly, severe financial anxiety remains much more the exception than the rule among homeowners. When asked to describe the condition of their personal finances these days, 20 percent said they’re “very secure” and 59 percent “somewhat secure”; 12 percent termed them “fairly shaky” and 8 percent “very shaky.”