Wednesday, August 22, 2007

Financial Times Editorial Comment: US housing market

Financial Times Editorial Comment: US housing market
Copyright The Financial Times Limited 2007
Published: August 22 2007 12:27 | Last updated: August 22 2007 12:27


The US housing market was already struggling. According to the S&P/Case-Shiller index, the price of single family homes fell 2.8 per cent in the year to May. Recent dislocations in the credit market are likely to accentuate the pain. Most obviously, the turmoil in subprime and other riskier mortgage lending has underlined that a significant number of home buyers – who helped drive up or at least support prices in recent years – should simply not have been in the market.

According to Inside Mortgage Finance, subprime and Alt-A loans accounted for about one third of mortgage lending last year. Those markets have now seized up, amid rising defaults and uncertainty over the value of structured products that were created from the loans and sold on to investors. Jumbo loans, of more than $417,000, accounted for another 16 per cent. That market is not closed, but faces serious short-term problems. Admittedly, some subprime and Alt-A borrowers might be able to access mortgage finance in other ways – perhaps by putting up more equity to qualify for a prime loan or going through government-sponsored channels. But, unless there is a radical improvement in sentiment, a significant number of potential buyers will simply disappear from the market. That could put further downward pressure on previously overexuberant prices which are now are being undermined in some areas by high levels of unsold inventory.

Meanwhile, a large chunk of adjustable subprime mortgages are poised to reset to a higher interest rate later this year, potentially triggering more defaults and distressed sales in certain areas. Much of the speculative buying that powered hot markets has disappeared. And even interest rates on prime mortgages have risen in recent months, despite a fall in Treasury yields.

If the Federal Reserve cuts interest rates in response to credit market problems, the housing market might get some respite. But the most likely outcome is that prices will remain under pressure.

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