Magazine article Mortgage Banking

Housing Faces Long-Term Prosperity but Painful Correction

Magazine article Mortgage Banking

Housing Faces Long-Term Prosperity but Painful Correction

Article excerpt

Even with a sharp drop in demand, an oversupply of housing stock, tightening credit standards and an unknown number of loans at risk of foreclosure, the housing market's long-term outlook looks quite bright, while the current correction is likely to get worse before it gets better, according to a report by Harvard University's Joint Center for Housing Studies, Cambridge, Massachusetts.

The center's 2007 State of the Nation's Housing report notes that after years of setting records, housing starts and sales both fell in 2006 and are on track to end this year even lower.

Homebuyers on the margin of qualifying for mortgage loans finally pulled out of the market despite the availability of creative mortgage products that helped them keep up with higher house prices, according to Nicolas P. Retsinas, director of the Joint Center for Housing Studies.

"As buyers left, home sales fell, and house-price appreciation slowed in some areas and fell in other areas. Investors and second-home buyers also started to leave," said Retsinas. "The air went out of the inflated housing market as higher home prices and interest rates finally tempered demand. Many buyers are now waiting on the sidelines hoping prices will fall."

It is too early to determine when the housing slump will end, as house prices are only beginning to soften while loans most at risk are just starting to hit their reset dates, and credit standards have tightened, added Retsinas.

The report noted that the adjustment will be particularly painful for those homeowners overwhelmed by higher mortgage payments, lenders that underestimated risk, and builders and owners forced to sell at lower prices.

Meanwhile, the report warned that uncertainty about credit availability hangs over the housing market.

"While it is clear that lenders underestimated subprime risks, it is unknown how much worse conditions may get. It is especially troubling that subprime losses have been heavier than expected at only the first sign of softer prices and loan-rate resets," noted the report. "Much of the hope for a recovery in the for-sale markets now rests on the economy staging a soft landing, markets drawing down the excess supply and loan performance improving."

Yet, for however long the correction lasts, housing markets will eventually recover. …

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