Forecasters predict further housing market slump

Some experts contend that high borrowing rates and low supply signal ongoing decline.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the June 18, 2007 edition

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BOSTON - Usually, home prices are an exception to the old rule that what goes up must come down.

But in the aftermath of a historic housing boom, it now looks possible that property values in much of the nation will be weak – and possibly falling – for some time to come.

This is the case, many economists say, even though the overall economy remains on solid footing. They cite several reasons:

•Potential buyers face a new hurdle, with the cost of borrowing up sharply in recent weeks. The average interest rate on a 30-year fixed loan hit 6.74 percent last week, up from 6.21 a month earlier.

•Although the real estate market has cooled considerably from the peak sales year of 2005, inventories suggest that supply and demand haven't yet come into balance. In April, the number of homes on the market was 23 percent higher than the previous April.

•The run-up in home prices was built partly on an unprecedented surge in risky lending: To borrowers with poor credit history or no down payments. Those excesses take time to work off. Foreclosure rates have recently reached record levels and may continue to rise over the next year as adjustable-rate mortgages reset for more borrowers.

The biggest worry is that high interest rates will persist, curbing buying activity.

"What we've been building into our forecast is that sales are close to a bottom," says James O'Sullivan, an economist at UBS Securities in Stamford, Conn. "The risk now is that we're actually going to get another leg of weakness in home sales."

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