NEW YORK (CNNMoney.com)
-- Subprime lenders are already getting crushed,
but the impact rising mortgage delinquencies
will have on home prices overall is still an
open question.
At a minimum, it means financing is drying up
for those with less-than-perfect credit and that
spells fewer home buyers.
And foreclosed properties will add supply to
a housing market that already has too much.
"It's going to be a really big deal," says
Dean Baker, co-director of the Center for Economic
and Policy Research.
"[National] inventory is 20 percent higher
than last year, vacancy rates have soared and
prices are down about 3 percent," he says. "Now,
with the tightening of credit, I don't see how
prices don't fall another 5, 6 or 7 percent."
The tightening of credit could take as many
as one million buyers out of the market, says
Baker, citing Bear Stearns research. "Even
if you cut that in half, say to 400,000 or 500,000,
that's huge."
Mark Zandi, chief economist for Moody's Economy.com,
is also concerned. "I think the subprime
problems will take housing activity to a whole
other level," he says.
Zandi is projecting a doubling of subprime defaults
this year to 800,000. "Those homes will
go on the market at a discount and will weigh
on the market," he says. He also believes
that 500,000 fewer Americans will be able to
obtain financing because of the tighter standards.
All that has led Zandi to alter his projection
of a 3 percent decline in housing prices this
year to a mid-single digit decline. The hardest
hit areas, which he thinks will be Arizona, Nevada,
parts of California and Florida, will absorb
high single digit or even double-digit punches.
Not everyone paints as bleak a picture. "We
don't know how many subprime mortgage holders
will actually default," says Christopher
Mayer, an economist at Columbia University. "Banks
are working with borrowers [so they can keep
their homes]. Plus, there's plenty of liquidity
around for people looking for mortgage loans."
That's not to say he sees everything as hunkey-dorey.
Mayer thinks values in speculative markets had
gotten way ahead of fundamentals and that weak
local economies in the Midwest will depress values
there.
Top
10 sub-prime foreclosure markets (click here
to view CNNMoney's slideshow)
The extent of the subprime delinquency problem
is disputed. According to a report from the Center
for Responsible Lending (CRL), about 1 in 5 of
the subprime loans written in the past two years
will go into default, costing 1.1 million their
homes and unleashing a flood of foreclosed homes
on the market.
But Doug Duncan, chief economist of the Mortgage
Bankers Association, thinks CRL is overly pessimistic,
noting that defaults for subprime mortgages have
never exceeded 10 percent in any given year.
And he argues that most of the loans written
before mid-2005 are unlikely to fail because
they are already out of the danger zone - they've
either reset with their borrowers continuing
to pay them off or the increased housing values
that accompanied the boom have boosted home equity
enough so that owners have comfortable cushions.
More significant than defaults may be the impact
of credit tightening.
"Banks have become much more cautious.
Lenders are tightening, not just subprimes, but
Alt-As (not quite prime) loans and primes as
well," says Ellen Bitton, founder of the
Park Avenue Mortgage Group.
Lawrence Yun, an economist with the National
Association of Realtors, which tends to have
an optimistic view of home markets, is projecting
the number of potential homebuyers unable to
obtain financing because of the subprime crisis
will average about 20,000 a quarter.
Defaults, he believes, will come to perhaps
one-half of one percent of mortgage holders,
perhaps 200,000 homeowners. NAR's position is
that the impact on prices will be only slight.
"Unlike the last housing crisis in the
early 1990s, the economy is very sound; people
are getting jobs, not losing jobs," says
Yun.
Baker, perhaps the most pessimistic of the prognosticators
(he is someone who sold his Washington, D.C.
home a couple of years ago in anticipation of
it falling in value), saves most of his concern
for the markets that had the most speculation
- Las Vegas, Arizona and parts of Florida. Meanwhile
New York, Boston, and coastal California, and
even D.C. should hold up OK, he says.
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