Spring May Prove Chilly For Home Sales, Mortgage Activity

Spring has sprung. That usually means good times in the housing market. This year, however, it’s threatening to become a grim season of reckoning.

Signs of a sobering slowdown emerged throughout March, ranging from gloomy forecasts among home builders to a growing number of borrowers struggling to make payments on exotic home loans they probably shouldn’t have obtained in the first place.

The latest flare came when Lennar Corp., one of the nation’s largest home builders, reported a 73 percent drop in its first-quarter profits and warned that its results for the remainder of the year won’t live up to expectations.

The bleak news threatens to weigh on already drooping home prices, a factor that could undermine potential sales: Prospective sellers may hold off on selling in hopes of a turnaround, while would-be buyers may put off mortgage applications in hopes of getting an even better deal later in the year.

The additional dent in home sales could further slow the overall economy, eroding demand for home furnishings and materials for renovations.

Reflecting the worries about the threat to the overall economy, economist Steven Cochrane says the risk of recession beginning later this year are increasing. He estimates a 25 percent chance of a recession within six months, up from 20 percent in February.

“Things seem to be snowballing very quickly,” said Cochrane, a senior economist with Moody’s Economy.com. “It’s going to be a weak spring.”

Other veteran market observers are more sanguine.

“We don’t think the market is in that bad of shape,” said John Karevoll, industry analyst for DataQuick. “It’s just not in as good shape as it was two years ago.”

Some real estate markets are holding up remarkably well.

In Southern California, for instance, a mid-priced home sold for a record high of $495,000 in February, a 5 percent increase from the previous year. So much for plummeting California mortgage loan demand.

Though the numbers haven’t been finalized, experts believe Southern California prices reached another high during March.

Nationally, by contrast, a mid-priced existing home sold for $212,800 in February, down 1.3 percent from last year, even as mortgage rates remain near or at historic lows.

Nationally, 19 major metro areas face a greater than 50 percent chance of housing price depreciation during the next 18 months, up from 11 a year ago.

The somber outlook marks a dramatic shift from the euphoria that prevailed in 2005. Years of steadily rising home prices had spawned a giddy, greed-driven atmosphere that seemed to make people forget about a basic law of economic gravity: what goes up eventually comes down.

As housing prices soared, mortgage providers entrusted more money to borrowers who probably would’ve been turned away under normal conditions.

The risky behavior propelled the rapid growth of bad credit home loans - a.k.a. “subprime” mortgages designed for borrowers with poor credit histories.

By some estimates, about $1.3 trillion has been lent to subprime borrowers across the country. That’s nearly as large as California’s economy.

Subprime mortgages invariably carry higher rates, but lenders lessened the burden by charging an extremely low initial interest rate or waiving fees altogether for a fixed period of time.

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