The ups and downs of every economic cycle have always been directly impacted by the health of the real estate sector. The severity of that impact, however, is open to discussion — depending, of course, on how you choose to massage the data to prove your point.

Delivering the results of his research as part of an economists’ panel on the last day of California Realtor Expo 2006 in Long Beach last week, Christopher Cagan, Ph.D., Director of Research and Analytics for First American Real Estate Solutions, said that even with $1 trillion of adjustable-rate mortgages ready to reset to higher interest rates in both 2007 and 2008, he believes the number of defaults and foreclosures resulting from the increased mortgage payments will be “painful but won’t break the economy or the market.”

Basing his comments on data collected on first mortgages — with an emphasis on those originated between 2004 and 2005 — Cagan said, “We have to figure out who has equity and who doesn’t. All those who bought or refinanced in 2003 or earlier are likely to have equity.”

Cagan’s report sorts various loans by how sensitive, or risky, the loans are. He categorizes the most risky — those with low initial rates like interest-only and negatively amortizing loans — as red loans. Those classified either orange or yellow loans are more likely to have resources behind them to keep from default.

According to Cagan, 90 percent of all red loans that have equity difficulty will go into default, while 70 percent of all orange loans are estimated to go into default because they are already under financial distress. Lastly, 50 percent of the yellow loans may go into default.

Breaking the data down, Table 18 in Cagan’s report shows as many as 1.4 million loans in the red category at an original value of $430 million; 3 million loans in the yellow category with an original value of $819 million; and 3.3 million loans in the orange category with an original value of $637 million.

In all, the table is the basis for Cagan’s belief that a total of $300 billion in homeowner equity is at risk, with mortgage resets being a strung-out process over a five-year time period rather than a one-time event. During this reset period he estimates losses of approximately 1 percent of homeowner equity a year.

Still, the bottom line is no matter how you divide up the data, you can expect foreclosure levels to increase over the next few years as the various forms of adjustable mortgages utilized to fund purchases of more home than most people could afford ratchet up their interest rates. In fact a recent Wall Street Journal Online/Harris Interactive Personal Finance poll revealed that 38 percent of adults have used a “creative or payment option mortgage” in a home purchase in 2006, a 5 percent increase from 2005.

According to the RealtyTrac September 2006 U.S. Foreclosure Market Report, on a yearly basis foreclosure activity was up 63% from the same month last year. This combined with Cagan’s statistics points to more future opportunity awaiting investors, real estate professionals and hopeful home buyers looking to RealtyTrac for bargain foreclosure properties.