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For immediate release: October 12, 2005

Dallas Fed’s Southwest Economy Focuses on Mortgage Risks, Home Prices, Financial Crises and Mexican GDP

DALLAS—The latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy focuses on mortgage risks, housing prices, financial crises and Mexican GDP.

In “Has the Housing Boom Increased Mortgage Risk?” assistant vice president and senior economist Jeffery W. Gunther and senior economist and policy advisor Robert R. Moore find that in regions where housing prices have increased rapidly, more borrowers are choosing adjustable rate mortgages (ARMs) or nontraditional mortgages in which initial monthly mortgage payments are low but increase significantly over time.

Gunther and Moore say judging mortgage risk based on delinquency rates on traditional ARMs and nontraditional mortgages in areas of high home appreciation could be misleading because borrowers who could not afford the sudden increase in mortgage payments could simply sell their homes for a profit rather than default on the loan.

However, problems could arise if house prices and demand drop in these areas because homeowners involved in these riskier mortgages would be unable to get out of them as easily.

“It is the possibility of stagnant or falling home prices in the future, combined with the potential, built into much recent borrowing, for increases in the level of mortgage payments relative to income, that gives rise to concern, ” Gunther and Moore conclude.

In “Making Sense of Elevated Housing Prices,” vice president and senior economist John V. Duca finds that while housing prices in the Northeast and Pacific states may be overvalued, it is unclear that there is a national housing bubble.

However, if a bubble does exist and housing prices were to decline, he asserts that the primary macroeconomic risk would be to magnify the impact of a “new economic headwind.” A jump in mortgage interest rates, for example, could lower home prices, which would then slow construction and restrain consumer spending.

Other mechanisms that could trigger a decline in housing prices include job market weakness and regional recessions.

In “Financial Crises: Still a Mystery,” Felipe Meza, assistant professor at the Universidad Carlos III de Madrid, and Erwan Quintin, Dallas Fed senior economist, discuss the impact financial crises have on economic activity in developing nations.

While economists have made strides understanding why financial collapses like Mexico’s 1994 Tequila Crisis occur, it is still unclear why productivity drops as much as it does after the collapse. The authors speculate that one explanation could be a temporary fall in the quality of labor as workers transit to new sectors of activity.

In “Mexican GDP Falls but No One Notices,” Franklin D. Berger, technical support and data analysis director, explains that the statistical release by Mexico’s census bureau on second quarter 2005 gross domestic product misses the mark because it headlines a distorted year-over-year figure.

Although the Insituto Nacional de Estadística, Geografía e Informática (INEGI) seasonally adjusts data, it continues to report GDP growth changes without taking into account the Easter bias.

During the Easter holiday in Mexico, consumer spending drops significantly. Since the holiday occurred in different quarters in both years, the statistic is unreliable, according to Berger.

Find the September/October issue of Southwest Economy online at


Media contact:
James Hoard
Phone: (214) 922-5307