Freddie Mac Housing Report: Beware of Two Storms

Freddie Mac seems to be seeking a little cover in its March 2007 Economic Outlook released late last week.

The outlook states that most analysts expect things to improve late in the year, as home mortgage loan traffic in the spring market will provide an important test of the environment. However, hedging its bet, Freddie quotes “even the most cheery forecasters” as warning about two possible storms still on the horizon.

1. The burgeoning overstock of unsold homes. While official government figures reported that the inventory of new homes peaked last July and has declined slightly since them, Freddie warns that the number of unsold new homes is likely much higher than the official figures because sales and inventory figures are not revised to reflect cancelled contracts.

Vacant existing homes for sale represent another source of hidden inventories; these vacancies soared to record levels last year. Condos are the most affected sector with vacancy rates over 11 percent in buildings with more than 10 units.

This oversupply of houses has, of course, affected house prices, especially in those areas that experienced the biggest boom during the days of the bubble. The Freddie Mac Conventional Mortgage Home Price Index, while naming seven states, including California and Nevada, where prices declined in the fourth quarter, points to a 4.9 percent increase nationally.

2. The deteriorating sub-prime mortgage market. Early payment defaults on subprime loans in the first half of 2006 were at more than triple the rate of defaults one year earlier. Even the non-subprime market is showing signs of stress with delinquency rates on mortgages at commercial banks reaching the highest level in four years.

Bank regulators have called for stricter underwriting standards and the Federal Reserve’s Senior Loan Officer Survey reported that 15 percent of reporting banks were tightening standards on bad credit mortgage loans, the highest percentage since the early 1990s.

Still, there is no sign of a credit crunch in the prime mortgage market. Rates continue to be low and the GSEs continue to provide liquidity so borrowers continue to have access to mortgages at reasonable terms.

Freddie states that “home prices remain the most difficult of housing-related statistics to forecast due to the non-homogeneity of homes and the inclusion of unrelated benefits in sales contract prices such as seller-paid closing costs.”

The March projections for the year shows a modest 2.8 percent increase, much lower than the 6.2 percent rate in 2006 and lower than the 3.3 percent appreciation anticipated in the February forecast.

SOURCE: Mortgage News Daily