Thread: Fed's Mishkin: Housing Could Tank Badly

Fed's Mishkin: Housing Could Tank Badly

MoneyNews
Friday, March 7, 2008
WASHINGTON (Reuters) - A decline in U.S. home prices is needed to attract buyers back and end the housing slump, but with no bottom in sight, more trouble lies ahead for an economy that may already be in recession.

This is a growing concern among Wall Street analysts and policy-makers, like Federal Reserve Governor Frederic Mishkin, that potential home buyers may wait on the sidelines for an extended period.

"If house prices fall more than expected, and that condition leads to more adverse expectations for future changes in house prices, then housing demand could fall as a result," Mishkin warned a group of key economists meeting in the Washington area this week in one of the bleakest public speeches by a Fed official during this business cycle.

Typically, falling home prices help stave off a downturn by boosting demand for homes and reducing the backlog of unsold homes. Even though U.S. home prices fell last year for the first time in a generation, sales continue to slow, only adding to the glut of inventories.

At the current sales pace for previously owned homes during January, there was more than 10 months' worth of homes for sale, according to the National Association of Realtors.

That was much more than the 6.5 months' supply available during the peak of the housing boom in 2006. That also comes as sales have slipped for the past six months, according to the real estate group.

NO BOTTOM SEEN

But economists fear there is no bottom in sight and that's making everyone jittery: the buyer, the lender and the investor.

"I think it's freezing the market right now," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. "Home buyers are not going to catch that falling knife and that's going to weigh very heavily on the housing market through this year and next."

Home prices have indeed fallen according to the real estate group, which reported a nearly 5 percent drop in median prices for previously owned homes, the bulk of the housing market, in January from prices a year ago.

The group projects that prices for new homes will tumble 6 percent this year and 1.2 percent for previously owned homes.

Analysts warn that until there are signs the housing market has stabilized or bottomed out, buyers and lenders are likely to be very cautious.

"We're not near there yet so people are going to continue to wait on the sidelines," said JPMorgan economist Michael Feroli.

Since September, the Fed has slashed its benchmark interest rate by 2.25 percentage points in an effort to end a growing credit crisis and boost the economy. Economists are expecting the central bank will continue on this path even though there are signs of inflationary pressures.

Even with such price pressures, analysts believe the central bank needs to continue with rate cuts, saying this is key in bringing an end to what has been seen as the worst housing downturn since Great Depression.

"The Fed should forget about everything else now and just do whatever is necessary to bring a bottom for home prices into sight," said John Lonski, chief economist at Moody's in New York.

Timing is crucial because the Fed's latest data shows that the net wealth of U.S. households in the final three months of last year fell for the first time in five years as the value of real estate holdings and stocks weakened.

In that report, the percentage of equity that Americans have in their homes sank to the lowest since 1945.

"Not only have the fundamentals for housing shifted, but the psychology has shifted. Now it's pessimism with expectations of future price declines and this is not going to resolve itself quickly," said Zandi.

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Foreclosures Climb to Record, Worse to Come

MoneyNews
Friday, March 7, 2008
WASHINGTON -- U.S. home foreclosures and the share of borrowers who face losing their homes rose to records in the fourth quarter and those figures will worsen, a mortgage industry trade group said Thursday.

The rate of failing loans swelled across all mortgage types but was led by a growing wave of subprime borrowers unable to make payments, the Mortgage Bankers Association said in its delinquency and foreclosure survey.

The rate of failing home loans should climb through much of the year as national home values sink, said MBA chief economist Doug Duncan.

"You should expect to see, as long as house prices are declining, an increase in delinquencies and foreclosures," he added.

Lower home values make it difficult for struggling homeowners to refinance and can create an incentive for them to simply walk away from their home and mortgage.

"We don't expect to see the peak in delinquencies or foreclosures until mid to late 2008," Duncan said.

A record 0.83 percent of U.S. home loans were entering the foreclosure process in the last three months of 2007 compared with 0.54 percent in the same time a year earlier.

The U.S. mortgage delinquency rate of 5.82 percent was the highest since 1985 and up from the 4.95 percent seen in the fourth quarter of 2006.

The rising foreclosure rate itself damages the home sales market since it adds to the glut of unsold homes and so puts downward pressure on prices.

The value of existing single-family homes in metro regions fell by a record 5.8 percent in the fourth quarter from the same period in 2006, the National Association of Realtors said last month.

Still, such a painful price correction is necessary to get out of the current housing slump, said Richard Dekaser, Chief Economist for National City Corp., Cleveland.

"The price decline we have already experienced is helping to restore the housing market toward equilibrium," he said.

SUBPRIME WOES

While just over one in twenty homeowners were missing monthly payments during the last three months of 2007, almost one in six subprime borrowers were delinquent.

The easy terms of subprime loans drew many borrowers with shaky credit during the credit boom and those failing mortgages have stoked anxiety in credit markets worldwide.

Wall Street and policy-makers have worried foreclosures will grow when many subprime loans face a built-in interest rate reset in coming months but recent rate cuts by the Federal Reserve Board have eased those concerns.

Since mid-September, the Fed has lowered overnight interest rates to 3 percent from 5.25 percent.

"The problem (of subprime resets) will be much less than thought though it will not be completely ameliorated," Duncan said.

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Champagne Shoppers on a Cheap Beer Budget

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So-called "aspirationalâ€