Housing - the worst is yet to come

Today, Bloomberg provided a neat summary of the state of today's housing market.

June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.

About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.

Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.

A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.

Subprime mortgages have rates that are at least 2 or 3 percentage points above the safest so-called prime loans. Such loans made up about a fifth of all new mortgages last year, according to the Mortgage Bankers Association in Washington.

The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group.

The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.

Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.