When--Or If--Housing Ever Hits Bottom Floor

This week HSBC Holdings admitted that it would be spending more money than originally anticipated to cover subprime loan defaults -- $1.76 billion more than analysts predicted. Now there’s concern over the mortgage-backed securities that go along with these riskier credit advances, and even more concern over the housing market in general.

The days of surging home prices, buy-and-flip investors and adjustable-rate mortgages have passed, and the economy on the whole is waiting for the sector to find its footing. But with housing stocks dropping and inventories still high, “The bottom is definitely not in sight,” says John Silvia, chief economist at Wachovia. He doesn’t see the market finding a floor until the third quarter.

Stephen Stanley is a bit more optimistic. The RBS Greenwich Capital chief economist definitely sees a bottom, at least on the demand side of housing. He cites steadying home sales over the past three to five months, an increase in mortgage applications for purchase and some anecdotal stories from real estate agents that buyers are doing some “toe dipping” to test the waters again.

“That tells me that a lot of the adjustment that needed to take place in terms of home prices coming back to more affordable levels has probably already taken place,” says Stanley.

Stanley agrees that it will take a while for inventory to clear out even if demand does stabilize. Most, if not all, of 2007 will see a contraction in residential construction, he says, but the peak was in the fourth quarter of last year so the tightening should weaken throughout this year.

Builders need demand to stabilize, though, says Stanley. Without buyers re-entering the market to chop away at those stagnant inventories, builders are just chasing a falling market.

FYI-A sub-prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders. Some are independent, but increasingly they are affiliates of mainstream lenders operating under different names. A subprime borrower is one who cannot qualify for prime financing terms but can qualify for sub-prime financing terms. The failure to qualify for prime financing is due primarily to low credit scores.