Subprime Fallout May Sink
Sales of New Homes
by Michael Corkery
From The Wall Street Journal Online
March 14, 2007
The rapid unraveling of the subprime-mortgage industry is stirring new concerns about the already weak housing market.
A report released yesterday by Credit Suisse analyst Ivy Zelman forecast that credit tightening for financially stretched borrowers will lead to a 20% drop in new-home sales in 2007, to about 890,000, as buyers find it more difficult to borrow for homes.
Coupled with a general waning in demand for housing and the exodus of speculators from the market, Ms. Zelman expects that credit tightening will cause housing starts to drop 35% to 45% through this year and into 2008 from their peak annual rate of 1.8 million units in January 2006.
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While subprime loans -- or loans to people with weak credit -- are often concentrated among entry-level buyers, Ms. Zelman says credit tightening "will affect the entire housing food chain."
If people selling an entry-level home can't find buyers, it often means they can't move up and buy a pricier home. Ms. Zelman, who derives much of her research from surveys with private builders and mortgage originators, also expects rising delinquencies among stretched borrowers to create a flood of foreclosures in the coming months that could add as much as 20% additional supply to the existing inventory.
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