Boom or bubble? Many in the media have written about a "housing bubble." But most housing economists quarrel with the use of that term. What's really going on with house prices?

Mortgage Banking, April, 2006 by Neil J. Morse

Sawyer connects these dots to the secondary market. "Many portfolios contain loans less than 12 months old," he notes, adding that delinquencies peak at about 36 months. "With the slowdown of originations [over time], a lot of lenders will be left holding a portfolio of rapidly decaying loans," Sawyer says. "This will affect profitability, the ability to pay dividends and creditworthiness to subordinate bond buyers--those who fund our businesses."

Although Sawyer foresees a weakening market in California, the California Association of Realtors[R] (C.A.R.), Los Angeles, reports that at the end of 2005, home sales and home prices had both set records for the year in the Golden State. The state's median home price is expected to increase 10 percent in 2006 to $573,500, according to the association. That would make five years running for double-digit increases in the median home price there.

Not your parent's home loan

But contrarians to the bubble theory point to the fact that most American families can still buy a house for a smaller percentage of their income than their parents did. Lower interest rates, smaller down payments and higher incomes are the reason. Except in the most expensive coastal areas of the United States, these consumer-friendly factors have more than made up for property price increases.

According to a research analysis by New York-based Moody's Investors Services' Economy.com, it would take 22 percent of a household's gross income to pay for a median-priced house today. True, that is 5 percent higher than 1998--but it is well below the 30 percent registered in the early 1980s, when interest rates routinely rested in the double digits.

Then, there's the down payment. Older American homeowners remember when it was de rigueur to put down 20 percent of the purchase price before a lender would put up the rest. That arrangement is a thing of the past. Today, borrowers literally need put in nothing.

More than 40 percent of first-time homebuyers used no-down-payment loans in 2005, according to the National Association of Realtors (NAR), Chicago, which found that 18 percent of repeat buyers put nothing down. In a survey of buyers and sellers, NAR found that 43 percent of first-time buyers received 100 percent financing, up from 39 percent in 2004 and 28 percent in 2003. NAR also reported that the median age of entry-level buyers is 32 and their median income is $57,200.

Add technology that has made lenders more efficient to the mix, plus all the capital flowing in from foreign investors, and you have the basic ingredients, some would say, for continued housing strength--if not a boom--in 2006.

Is fraud the wild card?

There are many factors that ultimately will determine how the housing market performs this year. And while most of the attention will be turned toward interest rates, property prices and even technological efficiency, it could end up being none of these that tells the tale. Instead, it could be fraud.

After years of automation and an "order-taking" mentality in the midst of plenty, a loan-performance meltdown is not out of the question.