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Wednesday, August 22, 2007


credit crunch fallout hitting housing very hard

before the credit market seizure of the last month, calculated risk opined that housing starts would have to fall to levels nearing 1.1mm.

but that was before the loan market died. now, no less than bank of america is forecasting starts to collapse to 700k.

As mortgage lenders tighten underwriting standards and home prices fall, Bank of America analysts estimated that 40% of home buyers who got a mortgage in 2006 probably wouldn't qualify for a home loan now.

That dwindling mortgage availability means that more home purchases will be cancelled as buyers fail to get the loan they need to pay for their new house. Such disruptions could strain home builder's access to liquidity and borrowing, the analysts warned.

"Our market checks point to a recent spike in cancellations as lenders pull loan commitments and buyers fail to qualify," Bank of America analyst Daniel Oppenheim and his colleagues wrote in a note to clients on Tuesday. "Lower cash flow will strain liquidity, particularly for high leverage builders."

Lack of mortgage availability will mean demand for new homes could fall 35% in 2007, the analysts said. That's bigger than the 20% drop they were predicting earlier this year when subprime problems emerged.

New-home sales could fall as low as 700,000 a year, down from 1.283 million in 2005, they said, noting that traffic at real estate agents is down sharply in August.

toll brothers' latest report did nothing to counteract that perception. it is probably facing cancellation rates in excess of 30% as people who preemptively put large downpayments on new homes are finding they cannot get a mortgage and have to forfeit the capital.

"Through our third-quarter-end [July 31st, pre-turmoil], our buyers generally were able to obtain both conforming and jumbo loans (loans over $417,000).

Nevertheless, tightening credit standards will likely shrink the pool of potential home buyers: Mortgage market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes."

Translation: "Look out below!"

cr further analyzed the plight of the homebuilders.

The optimum strategy for each individual builder is to keep building - it's the only way they can sell the land and pay their debt. But in the aggregate this is a losing strategy for the industry - a kind of Nash equilibrium.

Toll Brothers is essentially saying they would be OK if everyone else stopped building. That is what everyone else is saying too.

This leads to what is happening in San Diego - record REO sales swamping the market in San Diego, and the builders still breaking ground!

So as you say ... bring on the BKs.

housing prices are supposed to be sticky things that gradually decline over the course of several years. but the combined wave of supply and near-total collapse of demand in residential housing we are now seeing is likely to be without precedent in terms of the dislocations and pressures it generates. bankruptcy for some major builders seems unavoidable.

in chicagoland according to, inventory is up some 15% yoy, with 75th percentile prices having come down 3.2% yoy (ie, about $16,000 on a $500,000 home). my anecdotal experience in looking at realtor listings is that this understates the developing pricing aggression. housingtracker's chicagoland reo index (at 150) indicates that significantly more properties are in foreclosure than were in april -- just four months ago. i'd expect these negative trends to accelerate significantly now, with the mortgage-backed securities market having cracked.

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