UNIDENTIFIED WOMAN #1: I think most people hate to think of themselves as middle class.
UNIDENTIFIED WOMAN #2: Have what you need, but maybe not everything you want.
UNIDENTIFIED MAN #1: We have a car but we live in an apartment. That's middle class.
UNIDENTIFIED MAN #2: If you add a boat, then you're not middle class anymore. That's what changes it right there.
UNIDENTIFIED MAN #3: The middle class are families who are earning six figures.
UNIDENTIFIED MAN #4: Thirty thousand, $35,000 probably.
UNIDENTIFIED MAN #5: That means me, and it means I'm in trouble (laughter).
RACHEL MARTIN, HOST:
This is Hanging On, our continuing series about the American middle class, looking at the economic pressures of American life in 2016. And today we're talking about the housing bubble. What bubble, you say? Wasn't that the thing that caused the Great Recession? And isn't it over now?
Yes, all that is true, but our next guest says there are signs another housing bubble may be on the horizon. Stephen Oliner used to be with the Federal Reserve Board. Now he's at UCLA, where he analyzes real estate markets, and he's here now. Thanks so much for being with us.
STEPHEN OLINER: Thanks, Rachel. I'm really happy to be with you.
MARTIN: You track housing market indicators. What are you seeing right now?
OLINER: So we're seeing worrying signs of building excesses again in the housing and the mortgage markets. It's not that we're in a crisis today or in a bubble today, but there are trends underway that, if they'd run for a very long time, will put us back into a situation that will look a little bit like what we had in the last crisis.
MARTIN: That's unbelievable because we went through all kinds of collective strife over this, and there was legislation passed. So before we get into what didn't work in all those changes, what specifically are you seeing? What are the indicators?
OLINER: So there are really two types of indicators. The first concerns the risk that's in the mortgage loans that are being made today. So at the American Enterprise Institute, where I have a position as well as at UCLA, we analyze about 80 percent of the individual home mortgage loans made every month to purchase homes. And many of these loans are very risky, subprime-style loans that are now being made with government guarantees rather than being held by private investors. But nonetheless, they're quite risky.
MARTIN: How can this be possible? I mean, the whole problem, as I understand it, was that people who could not afford these mortgages were being enticed into signing on the dotted line, and the lenders knew it.
OLINER: Right, so the element of fraud that was rampant during the financial crisis in the lead-up to the bubble, that's basically gone. But there still are other ways for loans to be risky in many dimensions, and that is still happening. So let me give you just a couple of specifics. Now, we normally think that people in a prudent lending situation will put down 10 or 20 percent. That's so old-school. That's not happening now. The median down payment for a first-time buyer in the United States is 3 and a half percent.
If they were to turn around and need to sell the house, they wouldn't get enough money to repay the mortgage. So they're actually underwater on day one of the mortgage. There are other ways in which the mortgages are risky. One is that people are still stretching to buy bigger houses with larger monthly payments than is really safe given their incomes, and that is completely allowable under our current mortgage regulations.
MARTIN: Which is good and bad, right? After the housing crisis, people were so scared that nobody wanted to buy anything. And now you're saying we've overcompensated and people are living beyond their means again.
OLINER: Yes, that is what I'm saying. And we tend to think that a very strict, regulatory framework was put in place that would prevent this from happening again. And the problem is the following - 80 percent or so of the loans that are being made in the United States today are loans that have a government guarantee of some kind, federal government guarantee, and those loans are exempt from the regulations.
MARTIN: So what do you say, Stephen, to someone who is looking to get into the market right now and might be enticed by the fact that they only have to put 3 and a half percent down?
OLINER: Right. So I would say a couple of things. First, I think homeownership is a great thing. And if you want to become a homeowner, that's fantastic. Don't do it, though, because you think it's going to be a great investment. In most cases, it's not. The second thing is don't stretch. Be honest about how much you can really afford to buy given your other expenses and how you predict your income will change over the next couple years.
And the third thing would be if possible, finance the purchase with a 15 or a 20-year mortgage so that you build up equity quickly and be much less likely to be in a situation where you're underwater at some point in the future.
MARTIN: Beware of the bubble. Stephen Oliner is an economist with the Ziman Center for Real Estate at the University of California, Los Angeles. Thanks so much, Stephen.
OLINER: You're very welcome. Transcript provided by NPR, Copyright NPR.