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Credit Tightening to Cut Housing Demand in 2007
 Current credit tightening in reaction to the “abysmal” performance of mortgages recently made in the subprime market will cut effective housing demand by around 10% this year and make further cuts in housing production a virtual certainty, Thomas Lawler, of Lawler Economic and Housing Consulting LLC, told the NAHB forecast conference in Washington on April 26.
At the height of the boom when the subprime market was at full swing, FICO scores became the leading underwriting tool and traditional measures of loan risk such as debt-to-income and loan-to-value ratios were thrown out the window, he said.
Last year, according to figures from LoanPerformance, more than half of the purchase loans in the subprime market had piggyback financing and only 50% had full documentation; more than 90% of them were ARMs.
He attributed the lax lending standards to a surge in “speculative demand” that drove home prices up sharply in many areas of the country, leading to a decline in mortgage credit losses that in turn led to more aggressive underwriting and looser credit standards, and to a surge in the use of “non-traditional” mortgage products.
Unfortunately, he said, “if you’re looking at performance data in good times, traditional things won’t be important,” but now that housing is in a downturn, many of those subprime loans, especially those with no or a low downpayment and no documentation of income are experiencing “soaring” delinquencies despite declining unemployment.
While it is “admirable” for Fannie Mae, Freddie Mac and others to provide liquidity to enable credit-worthy borrowers to refinance and remain in their homes when they confront monthly mortgage payments they can’t afford, Lawler said that lenders may find that the incomes behind many of the subprime loans originated over the past few years were misrepresented. “These are bad loans that shouldn’t have been made,” he said.
Looking at loans that were made in the subprime market, Lawler estimated that as little as 20% of subprime borrowers who took out purchase loans last year would qualify if they were moved over to the prime or FHA market.
As a result of the subprime market, inventories of vacant homes, now at a record, won’t be falling significantly until the latter part of this year, he said, and downward pressure on home prices will intensify, with some regions likely to experience sizable declines.
Looking at annualized growth in the S&P/Case-Shiller Home Price Index in 20 markets for the last six months of 2006, composite home prices were down 4.3% — with Boston, San Diego and Washington, D.C. at the top of the list with declines of 10.41%, 9.32% and 9.27%, respectively, and Seattle, Charlotte, N.C. and Miami at the bottom with increases of 4.45%, 2.31% and 0.78%.
An S&P/Case-Schiller, CME look at future prices for 2007 projects a composite 6.1% decline for 10 cities, including a 6.1% decline in Miami.
The inventory situation is “unbelievable” in Florida, Lawler added. Inventories of unsold homes have tripled in parts of South Florida over the last two years, and the overall “months supply” of inventory in the state is more than double the national average.
Lawler is forecasting 995,000 single-family home starts this year, significantly lower than NAHB’s forecast of 1.163 million, but he said that his prediction could be too low because “a lot of builders would rather cut prices” and keep on building in communities they have already started. In that case, more starts “could make the price outlook a bit worse.”
 Looking at home purchase transactions only in the Office of Federal Housing Enterprise Oversight’s quarterly House Price Index, Patrick Lawler, OFHEO’s chief economist, noted that “the market turned very sharply” last year, with house price appreciation down from the previous year in every state except Texas.
The same data show that house appreciation for the year as a whole was down to 4.1%, Patrick Lawler said.
He joined in a discussion of the differences between the OFHEO index and the S&P Index. The OFHEO index is based only on single-family homes with loans purchased by Fannie Mae and Freddie Mac and it underrepresents properties financed with subprime loans, but it has broader geographic coverage.
Because the OFHEO index does not include loans over the conforming loan limit, it undersamples housing in expensive markets such as San Francisco, he said.
The standard House Price Index also includes refinancings, which recently have tended to overstate home price gains. Accordingly, Lawler indicated that his agency has been focusing more attention on its purchase transactions only index, which excludes refinancings.
Photos by Morris Semiatin
 Construction Forecast Conference Now Available on the Internet
The simultaneous Webcast of the Construction Forecast Conference — Spring 2007 held in Washington, D.C. on April 26 is available for purchase for the next three months.
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 NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
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