Whether some or all of the country is experiencing a real estate price bubble, in which speculation causes prices to rise to a level that is unsustainable, continues to be debated among economists.
At issue is the fast-growing market for home equity lending, which rose to $881 billion at the end of 2004 from $492 billion at the end of 2000, up 79 percent, according to the Federal Reserve. Overall mortgage indebtedness nationwide climbed 57 percent, to $7.54 trillion at the end of 2004 from $4.8 trillion at the end of 2000.
With average wages growing less than inflation, many homeowners have turned to home equity loans or lines of credit to make purchases, renovate their residences, consolidate credit card debt and pay bills they otherwise couldn't afford, such as medical expenses.
High home-price appreciation, low interest rates and the deductibility of the interest have made such loans especially attractive to consumers at a time when two-thirds of all households own homes -- leading to a rush to spend burgeoning home equity.
Veteran banking consultant Bert Ely said the warning comes at a time when a growing number of industry observers think the real estate price appreciation bubble "can't expand further." He added that whenever home prices rise for a long time, "some lenders go overboard."
Lenders need to take the message seriously, Ely said. "Banks are learning that 'guidance' is increasingly a code word for 'regulation,' " he said.
The government warning was issued on the same day that the National Association of Realtors called for increased consumer education on the dangers of what the trade group called "toxic" loans with predatory terms that hurt homeowners, such as high-interest-rate loans that could cause them to lose their homes if they lost their jobs. The group said that banking regulators were doing little to protect homeowners.
"Consumers are also at risk, and the possibility exists that they could lose their homes" to foreclosure, said JoAnne Poole, president of the Maryland Association of Realtors.
