The US housing market will continue to slide until 2009, say Moody’s in a note to clients released Tuesday. The US mortgage sector is “mired in an unexpectedly steep and persistent downturn”, says the rating agency, and things will get a lot worse yet. Forget the idea that the credit crunch may spill over into the real economy, it’s all the other way around.
Notes Moody’s:
Our current thinking is that the downturn, currently two years in the making, will last until 2009, with any sector recovery likely to be sluggish for some time after that
Mortgage resets have yet to peak, and will do so in 2008. Combine that with decline in house prices and a far stricter credit environment, and a unprecedented uptick in mortgage defaults is on the cards:
Mortgage credit problems are sure to mount further through at least mid-2008. The poorest quality subprime and Alt-A loans originated in 2005 and 2006 will face their first payment resets through next year, at a time when home-price declines are intensifying. These resets will be too large for many borrowers to manage, resulting in an estimated 2.5 million loan defaults during 2007-08, equal to some 5% of all homeowners with a mortgage
Such figures are far greater than in previous housing collapses.
This is a record percentage that will ultimately translate into an estimated and unprecedented $400 billion worth of mortgage defaults and $100 billion in losses to investors in mortgage securities. The financial fallout from these losses will be felt broadly. Most significantly, it means most homes will be worth less.
In fact, compare the current cycle to that of the last big housing crash – from 1998 to 1992, and there is a worrying observation to be made. According to Jeff Saut, chief economist at Raymond James:
What you find is that the 1988-1992 housing cycle peaked in the first quarter of 1988 (1Q88) followed by a decline in “For Sale Inventories” until the cycle troughs in the 4Q ’91 (some 15 quarters later, which is typical).
The current cycle peaked in the 1Q ’04, yet inventories have continued to rise, hitting an all-time high in 2Q ’07. And they are still rising! Moreover, in the 1988-1992 cycle vacancy rates among single family homes for rent stayed relatively flat. In this cycle they have risen dramatically. How this plays out is anyone’s guess
Historically, says Saut, a real estate crash has been symptomatic of some problem elsewhere in the economy. In the 1970s, for example, the crash in real estate prices was born on the back of interest rate hikes as oil prices shot up. Real estate prices do not crash on their own. Until, perhaps, now. Saut says that “real estate has become so entwined in the economic fabric of the country that it has morphed from an effect into a cause.”
From that perspective, it’s unhelpful that we keep making the distinction between the ‘real’ economy and the artifice of high-finance. The current boom has come about by deeply entwining the two. The problem didn’t start with credit or the finely tuned gears of the engineered economy – it started with the fish ‘n’ chips of poor subprime collateral: shaky mortgages and snake oil lenders on Main street.