No end in sight for housing slump

Despite uptick in September, a glut of homes suggests that more price-cutting lies ahead.

from the October 26, 2007 edition

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Even in some well-to-do communities, immune to the price drop until recently, prices are under pressure. That's the case in Madison, Conn., where the average sale price is down 11.2 percent from last year.

"There is downward pressure on prices, inventories have risen," says Brendan Grady, a regional vice president for Caldwell Banker.

However, Mr. Grady says the falling prices are attracting buyers to the upscale shore community. Sales this year are up 22 percent.

Falling home prices may have a larger impact on low-income families, says Andrew Jakabovics, an associate director at the Center for American Progress. "It's more likely that a low-income borrower has made a lower down payment, so when prices fall, they may have negative equity."

The implications for a buyer holding a house now worth less than when they bought it are significant. "No one will refinance the house if it's under water [below purchase price]," says Mr. Jakabovics.

Mr. Morici says home owners with negative equity in their homes will find it difficult to buy another house. "If you have to sell and there are not enough proceeds, you get a bill," he explains. "You can't walk away from it without the lenders coming after you."

Earlier this year, many investment professionals had hoped the real estate and mortgage markets would be able hop out of trouble by year-end. However, now there are doubts. On Wednesday, Merrill Lynch shocked the markets with a $8.4 billion write down.

"We just don't know how deep in we are," says Morici.

On Wednesday, an on-line poll of real-estate finance professionals attending the upcoming Asset Backed Security (ABS) East Conference in Orlando, Fla., found still more pessimism. Ninety-eight percent of the respondents see the problems in the subprime market now spreading to higher-rated mortgages, up from 85 percent in March. The ABS conference is for professionals involved in the securitization industry – where the bulk of the financial crunch has taken place.

However, "The only thing stressing is home prices; that's not so bad," says Mark Adelson of Adelson & Jacobs, a consultant to the securitization business. "The main-stream core of the mortgage business is Fannie Mae and Freddie Mac and that's fine. That is the part of the business that puts most Americans in their homes."

Alexandra Marks contributed to this report in New York

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