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Foreclosures put US housing recovery at risk
New-home sales in February fell unexpectedly by 3.9 percent.
from the March 27, 2007 edition
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Inventories of previously owned homes have also been edging up, according to numbers released last Friday by the National Association of Realtors. Sales volume rose in February, but the unsold inventory climbed a bit faster, to a 6.7-month's supply.
The challenge of loan defaults appears small relative to the overall market in which some 7 million homes can change hands in a year. But in any market, changes at the margins often play an important role.
James O'Sullivan, an economist at the investment house UBS in New York, says that as banks tighten their lending standards, the hit could plausibly reach as high as 10 percent of home-sales volume.
"We believe the tightening of lending standards will not necessarily result in a renewed downtrend in home sales if other forces, such as slightly improved affordability, are moving in the other direction," he wrote in a March 16 analysis.
Concern about bad loans has spread recently, as subprime loanmakers have faltered. Analysts have been scrambling to assess the scope of the problem and its implications.
Few see the challenge as a train wreck scenario. "This will not break the economy," says Christopher Cagan, the director of research at First American CoreLogic, based in Santa Ana, Calif.
But it remains a serious problem, in part because of the rapid growth of nontraditional loans in recent years.
Many borrowers were given initially low "teaser" interest rates. As those reset upward, often within a year of origination, the borrowers frequently can't afford their monthly payment.
According to Dr. Cagan's research, that "payment shock" factor will make teaser loans the most likely to go into foreclosure.
For most homeowners, rising home values allow them to pay off their loans if and when they sell. But for those who bought near the peak, foreclosure looms when they can't sell for the price they paid.
Global Insight in Lexington, Mass., recently assessed the impact of foreclosures on housing supply and demand. Its forecast: About 194,000 people who would have qualified for a loan during the boom won't qualify now, because of tighter credit. And 279,000 housing units will come on the market in 2008 due to foreclosure, up from a predicted 201,000 this year.
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