Tuesday, March 20, 2007


Housing Market Update:March 2007

The viscious cycle continues.

Housing starts were up 9% but permits were down. Housing starts are a very volatile number. One month does not a trend make. Yoda said that. So don't get too excited because housing permits were down and they have been down for 12 of the last 13 months. Permits are a more reliable indicator of future home building activity. Don't believe me then listen to David Seiders who has every reason to look for the silver lining, but didn't:

David Seiders, the chief economist for the National Association of Home Builders, said he doesn't believe that the downturn in home building has yet found a bottom.

"With the weather volatility, I think the permits is a better representation of the true trend," said Seiders. "I think we'll see a drop off in starts in March, and certainly no take off after that."

When a guy like David Seiders is giving the "we're doomed" message then pay attention. At least that's what I am taking from this. This guy is paid to look for good news.

In local news the housing market is starting to affect Chicago banks.

Problem construction and land development loans by local lenders increased 58% at the end of 2006 to $169.4 million from $107.2 million at the same point in 2005, according to Federal Deposit Insurance Corp. data.

Loans in which borrowers are late on payments by at least three months averaged 1.6% of local banks' total construction loan portfolios at the end of 2006. That was up from 0.95% in 2005 and was at the highest level in six years, according to Virginia-based SNL Financial.


It's unclear to what degree the bad loans ultimately will hurt banks' bottom lines. For now, property values appear to be stable, so bankers expect their ultimate losses to be slight. But that could change if land values decline. [Emphasis added.]

And the viscious cycle will guarantee that prices fall. The weakest links in the housing food chain, the subprime market, has been broken. This means fewer buyers in that market. Then subprime lenders go out of business. Construction and sales slow and GDP falls. The next highest level on the housing food chain can't or won't buy. Prices go down. Banks loan less...so on and so forth. Just as greed drove the market up fear is driving it down.


Gretchen Morgenson of the NYT outlines the destruction that could result from the implosion of the subprime market. Crisis looms in market for mortgages.

Meanwhile, investors wait to see whether the spring home selling season will shore up the mortgage market. If home prices do not appreciate or if they fall, defaults will rise, and pension funds and others that embraced the mortgage securities market will have to record losses. And they will likely retreat from the market, analysts said, affecting consumers and the overall economy.

A paper published last month by Mr. Rosner and Joseph R. Mason, an associate professor of finance at Drexel University’s LeBow College of Business, assessed the potential problems associated with disruptions in the mortgage securities market. They wrote: “Decreased funding for residential mortgage-backed securities could set off a downward spiral in credit availability that can deprive individuals of home ownership and substantially hurt the U.S. economy.”

Read the whole thing.


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