Foreclosures put US housing recovery at risk

New-home sales in February fell unexpectedly by 3.9 percent.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the March 27, 2007 edition

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America's housing market soared to record heights in recent years on easy credit and innovative financing. Now those forces are unwinding in ways that could exert a slowing influence on the housing market through this year and 2008.

A key symptom of the challenge ahead: Foreclosure rates are rising not just for risky subprime borrowers but for a range of adjustable-rate loans made in recent years.

Some 1.1 million homeowners who took out adjustable-rate loans between 2004 and 2006 will probably face foreclosure, according to a new forecast by First American CoreLogic, which tracks national housing markets. That number would surge to 1.9 million, the firm estimates, if home prices fall by 10 percent from where they began the year. In total, there are about 76 million owner-occupied housing units in America.

In itself, the problem isn't big enough to steer the housing market downward. It will take six or seven years for a scenario like this to play out. The affected home buyers and lenders bear the brunt of the financial damage. But foreclosures could create head winds that weigh against prospects for a housing-market recovery. It's not just that loan defaults add to the inventory of homes on the market. Potential home buyers also face an impact, one that is larger and more immediate: Lenders, in response to the credit problems, are tightening standards for new loans.

"If you can't get a mortgage, you can't buy a house," says David Wyss, an economist at Standard & Poor's in New York. "It's going to hurt. It's just a question of how much it's going to hurt."

Foreclosures by themselves won't dictate where the housing market goes. Supply and demand will be affected by a range of forces, including how the overall economy affects jobs and incomes, and the pace of home construction.

But as the spring selling season arrives, the housing market is struggling.

The numbers on new-home sales fell unexpectedly by 3.9 percent in February, according to numbers released by the US Census Bureau Monday.

Sales volume slid to the lowest level since June 2000. At the current pace of sales, about 8 month's worth of newly built homes are now available, the highest level since January 1991, during a recession and another housing downturn.

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