US realtors feeling subprime pain
Unsold homes inventory closing on record as would-be house buyers search for credit
By Barrie Mckenna - The Globe and Mail
U.S. realtors have acknowledged the mortgage credit crunch is hitting would-be home buyers - the latest clue that the real economy isn’t immune to the financial turmoil triggered by the subprime crisis.
“Some buyers with contracts have been scrambling when loan commitments did not materialize…” said Lawrence Yun, senior economist for the National Association of Realtors in Washington. “Other potential buyers are simply waiting for the mortgage market to stabilize.”
NAR reported yesterday that sales of existing homes fell to a five-year low in July, while the inventory of unsold homes hit the highest level since 1991, and not far off its record high.
At the current rate of sales, it would take more than nine months to work off the backlog of unsold single-family homes. Over all, home purchases fell 0.2% to 5.75 million.
With fewer buyers and nervous sellers, most analysts expect the housing slump to get worse in the months ahead.
“Prices would be falling even if all was well in the mortgage market, so in today’s troubled circumstances we have to expect steep declines for the foreseeable future,” said Ian Shepherdson, chief North American economist at High Frequency Economics.
Economist Gary Bigg of Bank of America Securities said the housing market will remain depressed until at least mid-2008. That could keep a lid on U.S. consumers, many of whom leveraged the value of their homes to finance their lifestyles during the boom.
With the housing market already in recession, analysts are worried the damage could spread to the general economy.
The home sales report “points to continued downward pressure on home prices, with possible contagion to consumer confidence, wealth and spending,” BMO Nesbitt Burns economist Sal Guatieri said in a note to clients.
Investor nervousness has also spread to the once-booming private equity sector, putting the brakes on merger activity.
Home Depot Inc. has reportedly agreed to take $1.8-billion (U.S.) off the price of its wholesale division to complete a deal struck before the recent turmoil began. Three investors - Bain Capital, Carlyle Group and Clayton Dubilier & Rice - will pay $8.5-billion.
There is a growing fear that the meltdown in the $1-trillion subprime mortgage market could grind the U.S. economy to a halt, or even recession in the coming months.
“It has become apparent that erosion in credit quality is spreading from mortgages to other consumer loans, such as autos and credit cards,” economist Zoltan Poszar of Moody’s Economy.com said in a report. “While increasing numbers of homeowners are seeing their homes foreclosed upon, there are also those who are managing to meet their now higher adjustable-rate mortgage payment, but at the expense of making untimely payments on their other liabilities, such as car loans and credit card loans.”
The risk of defaults on subprime mortgages and heavy debt levels now eclipse terrorism as the greatest near-term threats to the economy, according to a survey of U.S. business economists. The National Association of Business Economists survey, released yesterday, was based on responses from 258 economists.
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