The default risk on home loans is now at its lowest level in seven years thanks to an improving economy, record-low interest rates and stabilizing home prices, said a University of Michigan finance and real estate professor.

Under current economic conditions — gross domestic product growth of 2.5 percent and inflation of 1.6 percent — the risk of defaults on loans currently being originated is expected to be the same as mortgage defaults in early 2005, according to Dennis Capozza, a professor with the University of Michigan’s Ross School of Business.

Capozza compiles a University Financial Associates Default Risk Index that registered 128 during this quarter. The index peaked in 2007 at 362. He is also a co-founder and principle of University Financial Associates. Declining home prices made it riskier to make a home loan, he said.

“The most important factor in defaults is if the borrower has less equity in the house and is more likely to default,” he said.

The default risk index considers factors such as economic, political and legal variables, as well as demographics. It is forward looking on the risk of loans originated today, not for loans outstanding, Capozza said.

The consumer is in a better spot now than a year ago, which translates to fewer foreclosures and better paydown on loans, said Jim Russell, U.S. Bank Cincinnati area regional investment director and senior vice president, U.S. Bank Wealth Management. But the improving economy is just getting started and takes a long time to play out. He said the biggest risk this year to the ongoing economic recovery is a spike in gas prices at the pump.

“The key here is better employment trends,” Russell said. “More people are getting jobs.”