The United States of Subprime

by: Barry Ritholtz

Wednesday, the National Association of Realtors cheerfully forecast that Improvements in Mortgage Markets Bodes Well for Housing in 2008.

Buried deeper in this sunny prediction were their revised expectations for existing home sales; The NAR now expects a steeper than previously anticipated drop of 10.8%. This revision marks the eighth consecutive downwardly revised forecast from the NAR.

What is the cause of all this housing angst? Perhaps a clever front page headline in Thursday's WSJ provides a clue: The United States of Subprime.

It's an article on just how surprisingly widespread the sub-prime mortgage usage was over the past 10 years:

"As America's mortgage markets began unraveling this year, economists seeking explanations pointed to "subprime" mortgages issued to low-income, minority and urban borrowers. But an analysis of more than 130 million home loans made over the past decade reveals that risky mortgages were made in nearly every corner of the nation, from small towns in the middle of nowhere to inner cities to affluent suburbs . . .

The Journal's findings reveal that the subprime aftermath is hurting a far broader array of Americans than many realize, cutting across differences in income, race and geography. From investors hoping to strike it rich by speculating on condominiums to the working poor chasing the homeownership dream, subprime loans burrowed into the heart of the American financial system -- and now are bringing deepening woe.

The data also show that some of the worst excesses of the subprime binge continued well into 2006, suggesting that the pain could last through next year and beyond, especially if housing prices remain sluggish. Some borrowers may not run into trouble for years."

There's a nice interactive map at the (free) WSJ:

So while we learn today that the sub-prime debacle is even broader and deeper than previously realized, Wednesday's NAR release look all the more like the furious spinning it really was.

Here's how they put lipstick on the pig:

Conditions in the mortgage market are improving for consumers, which should help to release some pent-up demand in early 2008, according to the latest forecast by the National Association of Realtors.

Lawrence Yun, NAR senior economist, notes that widening credit availability will help turn around home sales. “Conforming loans are abundantly available at historically favorable mortgage rates. Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

Yun said it’s important to place the current housing market in perspective, and that 2007 will be the fifth highest year on record for existing-home sales. “Although sales are off from an unsustainable peak in 2005, there is a historically high level of home sales taking place this year – a lot of people are, in fact, buying homes,” he said. “One out of 16 American households is buying a home this year. The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains.”

Let's put the NAR spin aside, and look at the relative strength and weakness of construction:

Two years ago, Residential construction was about $688B per year, while Commercial Building (non-residential) was well under $300B. Residential has now fallen about 25%, while commercial has gained over 30%. Commercial construction has picked up some -- indeed, much -- of the slack of residential slippage -- at least in terms of GDP.

There is an element to the Residential boom not picked up by Commercial construction: The secondary effect on consumer spending. A major impact of the boom has been housing-driven consumer spending. While there is still plenty of MEW going on, it is definitely attenuating. We see revolving credit partially substituting, but that is only a temporary solution.

Back to school season was disappointing, and that typically bodes poorly for the holiday shopping season.

chart courtesy of AdvisorIntelligence

The United States of Subprime
Data Show Bad Loans Permeate the Nation;
Pain Could Last Years
WSJ, October 11, 2007; Page A1

Existing home sales expected to drop 10.8%National Association of Realtors says rate will be the lowest since 2002.AP, October 10 2007: 1:18 PM EDT

Improvement in Mortgage Market Bodes Well for Housing in 2008
National Association of Realtors, October 10, 2007