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Home Builder Confidence Slips over Subprime Worries

AP

Anxiety over trouble in the subprime mortgage market has home builders changing their vision of a recovery in the housing market. After a slow and steady rise from a low in September, the monthly survey of home builder confidence from the National Association of Home Builders slipped three points in March.

"Builders are uncertain about the consequences of tightening mortgage lending standards for their home sales down the line,” says NAHB chief economist Dave Seiders. “Some are already seeing effects of the subprime shakeout on current sales activity.”

As defaults and foreclosures rise, at 4.95% in the fourth quarter of 2006, according to the most recent survey from the Mortgage Bankers Association, subprime lenders are feeling a world of hurt. Subprimes are leading the surge in defaults and foreclosures, and more than two-dozen subprime lenders have gone belly up or been bought in just the last several months.

Big names like New Century Financial, which was delisted by the New York Stock Exchange last week and Accredited Home Loan, which is now subject to delisting by the Nasdaq for not filing its 10-K on time are just a few of the troubled lenders. Both of those companies are now the objects of lawsuits for allegedly misleading investors as to business and financial results, thereby artificially inflating stock prices.

Home builders had been growing more confident in the housing market this winter, as cancellations slowed and inventories began to shrink, but new homes, which are, on average, less expensive than existing homes, are dependent on a free-flowing mortgage market. Many of the big public builders cater to first-time home buyers, buyers who might be classified as subprime borrowers due to low credit scores. As the subprime market tightens under pressure from federal regulators and leery lenders, that has a very real impact on the builders.

“There’s no question that it’s going to be harder for a borrower to get a loan today than it was as recently as six months ago,” warns Guy Secala, president of Inside Mortgage Finance Publications. Adjustable rate products aren’t offering a much better rate than fixed today, and no-money-down offers or “teaser rates”, now widely blamed for the subprime implosion, might as well be bad words in the mortgage market today.

“Borrowers are going to find that they’re going to have to put more money down when it comes to buying a home, they’re also going to find that they’re going to have to verify income and assets in a much stronger way,” adds Secala.

The monthly builder confidence data released Monday are based on perception of three areas: current sales, sales expectations, and buyer traffic. All registered lower, although sentiment was mixed regionally, with small increases in the Midwest and West, and larger drops in the South and Northeast. The index is based on an average score of 50, with anything above being positive, anything below negative. The score for March is 36, down from 54 just one year ago.

The NAHB continues to forecast modest improvement in home sales during the balance of 2007, although Seiders admits, “problems in the mortgage market increase the degree of uncertainty surrounding our baseline (i.e. most probable) forecast."

Housing Market Headed South
The housing market is headed south in a big way as foreclosures continue to surge all across the country, but especially in CA, Nevada, FL and Arizona the states that had the biggest boom in the early part of this decade. Now as the market goes bust and the banks foreclose on all of these homes property values are going to fall unless the banks are going to hold out for another two or three years. The longer banks hold onto these unrealistic asking prices this will only exasperate the downturn by driving up inventory to dizzy heights that will cause days on market to soar.

The market is way overbuilt today thanks in large part to massive speculation, exotic mortgages, individuals burned by the stock market bubble and interest rates that were at 50 year lows just a few years ago. These factors ultimately drove home prices to the moon between 2000-2005 (August 2005-Peak). The imbalance today between supply and demand is the biggest hurdle facing the industry along with affordability levels at or near all time record lows. Nathan Z.

You haven't Seen Nothing Yet
I've been studying foreclosures in our county for four years. What Mr. Duncan is missing, is some of the national homebuilders came in with their on mortgage companies and aggressively sold overpriced homes, did inaccurate after tax analysis, didn't hire local appraisers, sold two-in-one buydown loans, used "charities" for down payment assistance(that are not charities at all, because the seller had to return most if not all of the gift amount back to the charity so we taxpayers could subsidize these sellers.)

In 2001 not all of these schemes were being used. However greed just made them more aggressive and now this meltdown will be much worse. I encourage you to get a copy of March 18th, 19th and 20th edition of the Charlotte Observer. There is a fairly detail analysis of the subdivision I began studying 4 years ago. Multiply this many times across the US. You haven't seen nothing yet. Ronald P.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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